Spread — the difference between the purchase price and the sale of the asset. Suppose there is an asset (futures, securities, currencies). On the stock exchange it is the ASK price (bid price i.e., the price demand for the asset) and price BID (seller’s offer). The purchase of an asset by a trader occurs at a higher price demand for the asset, selling at the lower BID price. The difference between these prices is called spread. Who defines it? Good question… Broker — in the case of trade within the system a broker (dealing center scheme B-Book) or market.
The higher the liquidity of an asset, the less the spread. For example, the spreads of the currency pairs are related to one of the most popular since they always have the supply and demand. For illiquid pairs like the South African Rand the spread will be much more.
The spreads for currency pairs
Despite the general principles of spreads in all markets, we are more interested in the spreads of the currency pairs because with them brokers cheat more. The spreads for currency pairs are:
fixed. Despite the price changes, the difference between the price of supply and demand will always be the same, for example, 3 points;
fixed with extension. For a long period of time it remains fixed, but can be extended at the discretion of the broker;
floating. Depending on the market situation, the spread can narrow or widen. It is often observed at the moment of news release, when because of the desire, for example, to buy the asset, the price goes up dramatically, and as there are no one wishing to sell the asset, the spread increases.
The size of spreads may be affected by the liquidity of the currency, volume of transactions, customer status (i.e. deposit size), the volatility of the market.
In the case when the spreads of the currency pairs are set by brokers, there may be some cunning on their part. For example, the broker declares the minimum (lowest) price gap, but charges the additional fee. The second option is slippage (orders are executed at the worst price). The conclusion:
- you need to choose a broker that offers small spreads without any commissions;
- hold the position as long as possible (within reason) that the commission would not “eat” most of the profits;
- use a system of spread return.
The system of partial return of spread is not inherent in all brokers, but traders whose brokers offer this possibility, may partially save on the spreads of the currency pairs. The essence of the system in the following:
- the client registers a trading account (real) by referral agent;
- opening and closing positions, the client pays spread to the broker;
- the broker returns part of the spread to the agent as payment for the attracted client;
- the trader (agent) returns part of the money to the client.
Important point: when you open a trade, the trader immediately receives a minus (loss), equal to the spread value. The spreads for currency pairs is one of the biggest problems in the strategies of scalping, where the difference between the prices can neutralize all the result of trade. And Yes, if the broker does not set the size of the spread (that is, trade is conducted directly in the international market), the broker enters an additional fee.
Which spread to choose? Fixed has the main advantage — the trader always knows how much he will pay on the deal, but its size, relatively, is in the range of 3-5 points. Floating spread is 1-2 points with the possibility of increasing the range to 10 points in the case of volatility. The conclusion:
- fixed spreads of currency pairs preferred by those who are less inclined to risk for novice investors;
- floating spreads are convenient for scalpers and those who prefer aggressive risky strategy.
We recommend you to make a pivot table of all accounts of brokers to compare their performance. Only one broker has an average of 3-8 options of various accounts which differ not only in spreads, but also a dozen of other parameters, such as type, types of orders, speed of execution, locking, etc. don’t be afraid to experiment and choose multiple accounts for different strategies!