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Forex Knowledge Spread

forex-spread.jpgWhat Is a Spread? Spread is the difference between the ask price or the price you buy at and the bid price or the price you sell at quoted in pips. If the quote between GBP/USD at a given moment is 1.4642/5, then the spread is 3 pips. If the quote is 1.46425/50, then the spread is 2.5 pips

Spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. You can turn that around to state that a spread is the purchase of one or more futures contracts and the sale of one or more offsetting futures contracts.

A spread is also created when a trader buying the physical pairs and offsets by selling pairs. Furthermore, a spread is defined as the purchase and sale of one or more offsetting pairs normally recognized as a spread by the fact that the two sides of the spread are actually related in some way.

Spread is how brokers make money. Wider spreads result in a higher ask price and a lower bid price. As a consequence, you pay more when you buy and get less when you sell, making it more difficult to realize a profit. Brokers don’t typically earn the full spread, especially when they hedge client positions. The spread compensates the market maker for taking on risk from the time it executes a client trade to when the broker’s net exposure is hedged.

 

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