The forex spread is a minor expense embedded within the bid and ask rates for every currency pair transaction. When examining the quoted price for a currency pair, you’ll notice a variance between the buying and selling prices; this variance is referred to as the spread or the bid/ask spread.
Alterations in the spread are quantified by small price adjustments known as pips. A pip signifies any change in the fourth decimal point for most currency pairs (or the second decimal point when dealing with JPY-denominated pairs). It’s crucial to recognize that the overall cost of your trade is influenced not only by the spread but also by the size of your trading position.
Advantages and Disadvantages
| Advantages | Disadvantages |
| The forex spread plays a crucial role in your trading because it affects both your gains and losses. | Forex spreads pose a risk, especially for novice traders, because they impact both potential profits and losses. |
| When you close the position, no commission or fee is applied. | Inexperienced traders may find that if the currency pair moves unfavourably after they enter a trade, their losses could match or exceed the spread. |
| Benefit from any price movement in the currency pair. | It’s important to note that spreads can vary, especially during certain market conditions like low liquidity and high volatility. |
| If the currency pair moves in your favour after you open a position, you can profit from the price difference between the entry and exit. | Traders should stay vigilant regarding prevailing market conditions and remain attentive to any notable spread fluctuations. |
| if the currency pair moves against you after opening a position, your loss will be equal to the spread amount. |
High Spreads v/s Low Spreads
| High Spreads | Low Spreads |
| An elevated difference between bid and ask prices can be a sign of either low liquidity or increased market volatility. | A reduced gap between bid and ask prices may suggest either high liquidity or a period of reduced market volatility. |
| Non-major Forex pairs, known as “minor” or “cross” currency pairs, commonly exhibit wider spreads when compared to major pairs. | Specifically, during major liquid Forex trading sessions such as in London and New York, you typically encounter narrower spreads, especially when dealing with major currency pairs. |
| This wider spread in minor pairs is primarily a result of lower liquidity levels since minor currency pairs do not experience the same level of trading volume as major currency pairs. |
