Understanding the Forex Spread
In Forex trading, the spread is simply the difference between what you buy a currency pair at, and what you sell it at. A lot of new traders are surprised when they discover that using U.S. dollars to buy euros is not quite as easy to close as using your euros to buy dollars. If you buy the EUR/USD pair, you must then sell the pair. The spread prices are called the bid and the ask. The bid is the price that a buyer spends to purchase an asset, and the ask is the price a seller is willing to part with the same asset. Generally, the bid price is going to be to your disadvantage, since the broker needs to separate these two things by a bit in order to make sure that they are making money. It’s unfortunate, but it’s a reality of the market, so it’s best to acknowledge it and overcome it as best you can.
The best way to overcome the spread is to predict as accurately as possible when rapid movement is going to take place. The currency pair that you use doesn’t matter, but lesser traded currencies do tend to move a bit faster. The downside to this, of course, is that these pairs are tougher to predict because there isn’t as much information about them out there. And when they do move, the changes are often very short lived. This isn’t a bad thing, but it can easily become a disadvantage if you’re not fully prepared for it.
Regardless of what you decide to focus your trading attention on, the faster the pair moves, the faster you will overcome the spread and the faster you can collect your profits. If the spread is 4 pips, you will have to wait until the trade moves 5 pips in your favor before you’re in the profit zone. If it takes two hours to get there, that’s fine. You will have a slight profit over this time, and that’s never a bad thing. But if the same thing happens in two minutes, you have made the same amount of cash, but 60 times faster. You can now use that extra 1:58:00 in time to make even more money. So, the faster an asset moves, the more money you can theoretically make. As you’ve probably heard, time equals money, and if your money is currently being used, you can’t use it in other places until it’s freed up.
The spread is what makes trading difficult, unfortunately, but it doesn’t need to keep you from making a profit. There are strategies out there that do a splendid job of compensating. Many advanced hedging strategies allow you to grind out small profits regardless of the direction of movement by exploiting small issues with the spread. The Advanced Loss Recovery system also allows you to make a profit regardless of the spread by taking out opposite positions until the spread is overcome. The spread provides a hurdle, but it’s certainly something you can get past with study and practice. The more time you spend trading and the more you learn, the easier it will be to fight against this obstacle and start making more money. It’s something you should worry about and account for, but it’s not something that you should let hold you back. Every single Forex trader deals with it, and many are very successful. There’s no reason why you cannot be successful, too