Forex trading

When dealing with Forex margins you will see that two prices are displayed for every set of currency (pairs), the bidding and the asking price. Traders can sell to companies using the rate of the bidding price, and dealers can buy from the companies using the asking price. 

Let’s take a look at the following price quotation: EUR/USD at 1.2881/1.2884. The bidding price is 1.2881 and the asking price is 1.2884. This means that dealers who want to sell this currency pair have to sell at 1.2881, and the dealers who would like to buy have to buy at 1.2884. 

The spread is the difference between the asking and bidding price. The spread covers the trading fees. Bonds, futures and stocks also have a spread. Let’s take a look at this example: A dealer has bought a certain currency at 1.2884 and he then proceeded to sell them straight away. This would result in a loss of three points (1.2884-1.2881) The dealer is better off by waiting for the sell price to rise at least 3 points so that the dealer is at break even. If the dealer waits until the currency rises to at least 4 points this would mean that the dealer has made a profit of 1 point.

A lot of web trading companies try to advertise margin forex trading as if it is free, with no extra fees such as service and commission fees. People who trade will probably already know that the fee for trading is actually the spread and it makes up a large part of the market’s revenue. Although the spread may look like it is a very small fee, it can quickly add up and the money in your Forex account or profit can soon whittle away. It is always wise to check the full costs of Forex brokers before doing any business. You should always allow for spread costs to work out your profit.

The customer always pays the spread. The businesses that do the trades generate their revenue by doing this. The cost of the spread can be variable, and is dependent on all the people involved. The spread of a Foreign exchange of international banks could be as small as one or two pips, whereas banks can increase the spread up to thirty or forty pips for the everyday traders. At some well-known tourist places at the exchanges, the spread has been told to be as high as four to six hundred pips

The competitive market place has ensured that the spread on web based trading of Forex is normally quite low. A lot of well-known companies dealing in Forex try to keep the spread equal to each other. Please see the example below to look at four well-known online Forex currencies:

A Forex trader will try to look for a spread that is as small as possible. A forex company mostly relies on the spread for their profit, and when the company can’t bring enough money in via the spread, they might add additional fees such as transaction fees.

When the market competition rises a lot of Forex brokers increase the spread which makes trading more expensive. Let’s take a look at an example: A currency value rises above expected heights which will lead to a huge amount of people wanting to buy that currency pair. Sometimes a broker will increase the spread on this currency pair to ensure that the amount of people buying/selling will stay in balance. It is recommended that Forex traders ask their Brokers about these spread increases. Some companies will use different spreads than others.