Basically, the spread is the cost that each of the operations that the Forex investor makes each time he makes an operation. The cost per transaction varies according to the broker with which the Forex investor is registered. Thus, these costs vary and there is no measure applicable to all platforms, and varies greatly if a Market Maker or ECN is used.
As for the language used around the spreads, it is known with the term “ask” to the difference between the price to which one buys with the real price. It is called “bid” to the difference between the price to which one sells with the real price. These two terms are commonly used in the language of Forex investments.
Spreads are, so to speak, the money that the Forex investor money managers or brokers charge for doing the trades he requests. These spread are the gain that these people or companies that give others the means to invest in Forex (especially for those who do not have large sums of capital).
How to select the most suitable broker in spread according to the needs of the Forex trader?
It is important to keep in mind that in order to obtain a low cost per operation, that is, to obtain low spreads, there must be few intermediaries between who requests the operation and executes it. The less intermediaries you have in an investment in Forex, the more likely it is that the spread will be low. This is because each of the intermediaries that are part of an investment will make a profit by performing such an operation, thus, the one that operates directly will charge the first one who requests it, the second will pay the first, but also look for a Gain, therefore it will charge more to another that requests the operation in order to obtain its profit, and the chain continues like this, intermediary through intermediary until arriving at the queue.
Generally, in the different investment platforms that are offered in the Forex market there are different prices per currency pair. Thus, the spread for the EUR / USD pair may be much lower than the spread for the EUR / JPY pair. It is important to find out in advance what spread the different investors are using the company to which the future Forex investor intends to ascribe, to know if these are adjusted to the conveniences of the investor. To explain it better, let’s say that a person who knows that most of their operations will be in the EUR / JPY pair, it is more convenient to look for a company where the spread of this pair is low even though suddenly in others Pairs do not come out so profitable.
How spreads work?
To better illustrate the issue of spreads in the Forex currency market, we will show you how this would work in a hypothetical case.
Let’s say an investor wants to buy in the EUR / JPY to 5 per transaction. Immediately the intermediaries of him will satisfy the request of his client, with the difference that they will be buying this request to 4 per operation, obtaining like profit by operation a unit. Then, if the investor wants to sell what he has bought (and assuming the price of the pair has not moved), he can only sell it to 4 units, as this is the price that is directly sold in the market.
That is why to gain profits when investing in Forex is necessary to overcome with advantage the price of the spread, otherwise our accounts will remain in zeros or negative balance.
Why is it important to know the spreads?
One of the biggest difficulties with regard to the topic of spreads in the Forex market world is to really know how much the company or broker that we have contracted for the service is charging for the operation. In fact it is possible to manipulate the spreads on the trading platform without the customers noticing. That is why every time the technological advances offer more guarantees for the clients in order to determine the cost of the spread in the company in which they are. In addition, Forex is monitored and sanctioned companies that can do patrimonial damages to their customers via this route.