What Are Spreads in Forex Trading?

Introduction

One of the things forex traders are quick to discover when they visit the trading platform is that the Buy and Sell prices displayed by the broker are usually different. Some curious traders might ask: Why should the prices for the same pair vary? For such curious traders, the reason for the price difference noticed between the buy and sell prices displayed on the platform is due to the spread. 

The broker usually adds this to cover his expenses for the services he renders to the trader. It could also be seen as the broker’s commissions. 

This work will therefore help you understand in detail the meaning of Spread and how to obtain a zero spread account for trading for those traders who are not comfortable with trading with spread accounts. 

What is forex trading? 

Whenever you think of exchanging one currency for another, then you are already indulging in forex trading. Thus, forex trading involves exchanging a particular currency for another using the US dollar as the standard for such exchange.

The advent of online brokers had made it easy for individuals to exchange their currencies anywhere without going to the exchange market to do so. They also allow investors to speculate on the future prices of these currencies and take positions in the market based on their forecasts. 

Meaning of Spreads

Spread is the term used to describe the price difference between the buy and sell prices displayed by the brokers on their platforms for the different assets traded. It is equally known as the bid and ask prices. 

When a trader places a buy order, the broker increases the current market price a little before offering it to the trader. The same is applicable when he places a sell order, the broker in this case reduces the price to be different from the market price before offering it to the trader. These increases in prices before offering them to the trader serves as the broker’s commission for the services he is rendering to the trader. 

The extra costs added to the prices of the different pairs traded usually vary from each other. Hence, the major pairs usually have higher spreads than the minor pairs. 

Ask price: When you place a buy order for any pair in the market, the price at which the broker offers such pair to you is called the Ask price. This price is usually higher than the current market price with a few pips difference. 

Bid price: Each time you place a sell order in the market, the price at which the broker executes your sell order is called the bid price. This price is usually lower than the market price based on the time the trader placed the order. 

What is Zero Spread accounts

Some traders today are not happy when the broker places an extra cost on the different pairs they are trading. Such traders usually create an account with zero spread forex brokers, which helps them to determine their exact entry and exit price. A zero spread account is therefore one without an extra cost added to it. 

Here, the bid and ask prices for the Zero-spread accounts are usually the same with not much difference between them. However, brokers charge commission when the position is closed while using the zero-spread accounts 

Advantages of using the zero spread account

It helps traders to determine their exact entry positions.

Increases the trader’s profit margin. 

Disadvantages of using the zero spread accounts

Commissions are charged when the trader closes each position

Some brokers require a minimum deposit of $1000 and above to use this account.