Spread is the difference between the two prices of an asset in the financial sector, on the one hand, the value of your purchase and the value of the other purchase. It is a simple statistical measure that we use to determine the degree of liquidity in the financial space on which it is calculated, and the smaller margin the greater the liquidity in market. It is a very common term in any type of close or financial discussions, and is one of the most important elements of this sector. In addition, it has many meanings depending on the specific financial market in which it is used.
Spreads in Options, Futures and Stock Market Outside of the usual use in the financial sector, spreads also have a special meaning if used in accordance with the markets:
- In the options market, spreads are a strategic combination of buy and sell prices that allow us to profit from any type of market, although they usually do not offer large amounts of profits.
- In the futures market, spread refers to the difference between two futures prices for the same asset or the price the next day for two different assets.
- In the stock market, spread can also refer to difference between the price of two stocks such as Apple stock and Google stock
Supply and demand in Forex: It is one of markets that operates with the highest degree of attention to spreads. In this case, spreads can be of two types: bid or ask, or what is same, which can have a bid and ask price. One of the first basic Forex tips is that we should be clear that term “bid” shows value of demand for a particular currency (although it can be any other type of financial asset.
How is the spread calculated in Forex trading?
The spread is the value of the difference between the buying price and the selling price in the Forex market. This price difference is determined based on the size of supply and demand. The greater the size of supply and demand for a specific pair of currencies, the lower the spread in this case, due to the availability of high liquidity in the currency market. Foreign.
The trader on the best Forex trading platforms does not need to calculate the spread manually, as the trading platform calculates the price difference automatically. The spread or price difference between the buying and selling price is measured in a unit called the point or PIP, which is an abbreviation for the term Percentage In Point and refers to the percentage of change represented in a point.
This unit of measurement is used by traders in the Forex market in order to calculate the smallest movement that occurs in the price movement of currency pairs. The point represents the fourth decimal number from the left for the exchange rate of most currencies, with some exceptions in some currency pairs such as the Japanese yen, where the point is calculated for the second decimal number. From the left.
Example: Suppose the euro currency is trading at a price of 1.1234/1.1235 against the US dollar, the difference between the bid and ask here is 0.0001, which means that the spread in this case is equal to one point or one pip.
Price spreads can be either wide, of high value, or narrow, meaning of low value. The greater the number of pips or pips, the wider the spread. Traders often prefer low spreads, because this means that trading will be affordable.
Spread and its types in Forex trading
There are two types of spreads or price differences for trading in the Forex market through the best international trading platforms:
Fixed spread:
The fixed spread in Forex remains unchanged regardless of the supply and demand for foreign currencies, and trading using this spread is the most predictable, because the trader can accurately predict how much the price of the currency will change so that he can start making profits.
Variable spread:
It is the most common spread, and it fluctuates within a specified range under the influence of market conditions. For example, the Euro/Dollar currency pair is one of the most traded currency pairs in the Forex market, and this is why the Euro/Dollar spread is lower than other foreign currency pairs.
Factors that affect the value of the spread in trading
Before you start trading foreign currencies via the best stock and currency trading applications, you must understand the factors that may affect the value and price of the spread in trading. The most important of these factors are:
Liquidity of the underlying financial instrument:
The size of the price differences depends on the financial assets traded. The more these assets are traded, the more liquid the market is. This means that there is a narrow gap between supply and demand, which leads to small spreads and price differences.
Trading volume on the financial instrument:
The spread also depends on the volume of trades that take place on financial assets, and measuring trading volume is a method through which we visualize and determine the amount of assets that are traded on a daily basis. The spread is often smaller for assets and financial instruments that have a large trading volume.
Spread and how to manage and reduce the spread in Forex trading?
There are two ways you can trade during the best trading times, during these hours there are many buyers and sellers in the market. As the number of buyers and sellers for a given currency pair increases, competition and demand for trades increases, and market makers often reduce the spread to get the largest amount of buyers and sellers.
- Avoid buying or selling assets that are slightly heavily traded. Many market makers compete in popular assets, such as major currency pairs and US stocks. Less competition and higher spread costs are reflected in the underlying financial assets traded.
Is it better to trade low or high spreads? Low spreads are generally viewed as less risky in trading. For example, traders often look for forex pairs that have small spreads of between 0.7 and 0.9 pips, as this generally represents lower market volatility and higher liquidity.
Who are Fixed Spread Brokers? Fixed spread brokers are a group of Forex brokers that offer fixed spreads on currency pairs, meaning that the difference between the bid and ask price of a particular currency pair remains fixed regardless of market conditions. This can be useful for traders who prefer cost forecasting, as it allows them to calculate the costs of their trades more accurately.
Why is the spread rising? The price difference or spread is the profit margin obtained by the party executing the transaction, whether it is a Forex brokerage company, bank, or exchange office. The wider the price difference between the purchase price and the selling price, the greater the cost of the transaction to the trader. Therefore, the price difference or spread is one of the important criteria in choosing a good trading broker
