Spread (spread, spread)
What is the spread on the ?
Spread (spread, spread) - The difference between the best Bid price (the price at which the base currency is sold) and the Ask price (the price at which the base currency is bought) at the same point in time.
What is the essence of the spread?
The minimum spread on the platforms is set market makerIn the further chain to the final trader spread increases, because it is also the earnings for dealing centers and brokers in the form of commission for each transaction.
Spread size is a criterion of market liquidity; the higher it is, the less liquid it is. In fact, that is why the spread has small values when trading popular currency pairs. For example, when opening an order on EUR/USD we see the quotes 1.0931/1.0933. The spread value for 1 lot is two points (or $20).
When opening any transaction, the trader immediately receives a loss equal to the value of the spread. For example, if you open a long position of two lots in the EUR/USD pair with a quote of 1.0931/1.0933, then the initial loss will be $40 (2 points of spread x 2 lots).
In order for this transaction to pass the breakeven point, quotes must change in the direction of the transaction by at least 2 points. Accordingly, in order to make a profit - even more.
The spread can be compared to the commission, which is automatically deducted when you open trades. With an honest broker, the spread is the main source of income. By the way, on stock exchanges, in order to regulate the market liquidity, spread limits are set: if its maximum value is reached, trading will automatically stop.
The term "spread" can also be used to refer to the difference in levels of return on financial instruments.
What are the spreads?
There are two types of spreads: fixed and floating.
- Fixed spread
A fixed spread remains unchanged regardless of the speed of the trend or supply and demand for the currency, trading with it is the most predictable, because you can accurately predict how much the price of the currency must change before you start to make a profit.
- Floating spread
The floating spread is the most common. It fluctuates within a certain range under the influence of market conditions and the broker specifies only the lower limit of this range. As a rule, during a quiet market situation the floating spread for popular currency pairs is within 2-5 points, but during news releases it may reach 50 or more points. That is why it is not profitable to use trading accounts with floating spreads for trading using robots and expert advisors, because automated strategies cannot quickly take into account changes in spread values.
What does the size of the spread depend on?
The size of the spread is affected:
- Currency liquidity
For major currency pairs, the spread is a few pips, usually within 10, unlike the exotic cross-courseswhere the difference between buying and selling can be tens of points.
- Volumes of transactions made
Small volumes due to overheads and large volumes due to increased risks are quoted with a large spread.
- Market condition
Spread increases during active trades on currency pairs, i.e. - during volatility. As a rule, such situations are observed when important news affect . Also, spread widening is observed during low liquidity, which is typical for the "night" and "holiday" market.
- Client status of the dealing center.
By setting low spreads for novice traders the broker encourages them to trade with this particular broker.
What is a spread refund?
The current widespread use of the rebate or spread refund service, which implies a discount that is expressed in the return of a portion of the spread (commission), regardless of whether a trade made a loss or profit.
Spread rebate service exists at almost all brokers, but there are also third-party rebate services, working on IB representation models.