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I just truly understood what spreads are, and how much they affect our trading. I want to share my understanding for those who are still curious.
Spread is the difference between the selling price (Bid) and the buying price (Ask). It applies whether you're trading Forex currency pairs, stocks, or even digital currencies. The principle is the same. For example, if you buy gold at $500 and want to sell for a profit, you need to sell it at $501 or higher. That difference is the spread.
In the Forex market, this difference is usually small, around 0.001%. But during volatile market conditions, such as when major news is released, the spread can spike rapidly. I’ve seen EUR/USD with a spread of 2 pips, but immediately after U.S. unemployment news was released, it jumped to 20 pips in an instant.
Why should we care about this? The spread is our cost and also the broker’s income. If you trade frequently, this small difference can accumulate into a significant amount of money.
There are two types we need to know: fixed and variable.
Fixed spread is a spread that the broker sets in advance and does not change. The advantage is that you know your costs upfront. The downside is that when the market changes, the broker might "requote" and ask you to accept a new price. This is called Requote, which can disrupt your trading plan.
Variable spread, on the other hand, fluctuates according to market supply and demand. There are no requotes, but costs can become higher during volatile market conditions.
Which one is better? It depends on your trading style. Small speculators tend to prefer fixed spreads, while large traders who trade frequently during busy markets often prefer variable spreads.
Final tip: the more the spread fluctuates, the harder it is to make profits. Try choosing popular currency pairs like EUR/USD or GBP/USD, which usually have more stable spreads. Also, select brokers offering low spreads. Remember, Forex trading isn’t a game; it’s about planning and risk management. Those who understand the system deeply have a better chance of winning.