Taking Note of Your Forex Dealer's Spread is Important
For individual investors the spread is one of the factors that will affect gains and losses. Use the
information below to consider how the spread will affect your profits and losses in Forex.
Your retail Forex dealer is the seller when you are the buyer and vice versa. So while you are using Forex
dealer for your Forex trades they earn more money when you receive less for a sale and you are charged more
for a purchase of currency which is described in Forex as the spread.
It is important for you to shop around for your broker considering the spread advertised by your Forex dealer.
The easiest way to determine the impact of spread on your transaction is to consider that you purchased a
currency pair and sold it before there was any difference or fluctuation in the ask and bid prices of the
currency pair.
Think of it like hearing news about gas prices. Gas prices go up or down based on a variety of factors and we
are informed that the overall price has gone up or down. This is like your currency pair. The overall
relationship between the currencies has gone up or down based on world events and other market influences.
But when you go to buy gas you still shop around knowing that some gas stations will offer gas for more or for
less compared to other gas stations. This has to do with gas stations trying to get your business rather than
the overall price in gas. This shopping around activity is the same in the Forex spread.
When you shop around it may seem like a minor variation in price just like with a gas station where one
station may charge you a penny less for gas than another one just down the road. Similarly, you may see a
spread in your currency pair that has a bid price of 1.0004 and an ask price of 1.0009. That means that if you
want to buy the currency pair you'll pay 1.0009 for a currency unit and if you want to sell you will pay
1.0004. A tighter spread in this case would be a bid price of 1.0004 and an ask price of 1.0008 meaning that
if you want to buy the currency pair it will cost you 1.0008 instead of 1.0009. This seems to be a tiny
difference.
To continue with the illustration above where you may decide that the penny difference in gas is negligible
and you will purchase gas at the more expensive station, you realize that the amount of gas you're purchasing
will determine the overall price difference in your gas purchase. In Forex your lot size will determine how
much in total you end up paying for the small differences in spread. So if you bought a standard lot of
100,000 units, you would pay the spread times 100,000.
So the spread for you if your Forex dealer gives you an ask price of 1.0009 and a bid price of 1.0004 is
0.0005. If you sell your units at the ask price you multiply that 0.0005 difference between the ask and bid
prices times your number of units which is 100,000 to arrive at a cost of $50 for the transaction. On the
other hand if you were dealing with a Forex dealer who gave you a tighter spread so that the ask price was
1.0008 with the bid price still at 1.0004 then your transaction would cost you 0.0004 times your lot size of
100,000 and your cost would be $40 instead.
Tighter spreads are better for Forex traders. When you are choosing your Forex dealer use the tips above to
determine how the spread will impact your profits and losses.
For individual investors the spread is one of the factors that will affect gains and losses. Use the
information below to consider how the spread will affect your profits and losses in Forex.
Your retail Forex dealer is the seller when you are the buyer and vice versa. So while you are using Forex
dealer for your Forex trades they earn more money when you receive less for a sale and you are charged more
for a purchase of currency which is described in Forex as the spread.
It is important for you to shop around for your broker considering the spread advertised by your Forex dealer.
The easiest way to determine the impact of spread on your transaction is to consider that you purchased a
currency pair and sold it before there was any difference or fluctuation in the ask and bid prices of the
currency pair.
Think of it like hearing news about gas prices. Gas prices go up or down based on a variety of factors and we
are informed that the overall price has gone up or down. This is like your currency pair. The overall
relationship between the currencies has gone up or down based on world events and other market influences.
But when you go to buy gas you still shop around knowing that some gas stations will offer gas for more or for
less compared to other gas stations. This has to do with gas stations trying to get your business rather than
the overall price in gas. This shopping around activity is the same in the Forex spread.
When you shop around it may seem like a minor variation in price just like with a gas station where one
station may charge you a penny less for gas than another one just down the road. Similarly, you may see a
spread in your currency pair that has a bid price of 1.0004 and an ask price of 1.0009. That means that if you
want to buy the currency pair you'll pay 1.0009 for a currency unit and if you want to sell you will pay
1.0004. A tighter spread in this case would be a bid price of 1.0004 and an ask price of 1.0008 meaning that
if you want to buy the currency pair it will cost you 1.0008 instead of 1.0009. This seems to be a tiny
difference.
To continue with the illustration above where you may decide that the penny difference in gas is negligible
and you will purchase gas at the more expensive station, you realize that the amount of gas you're purchasing
will determine the overall price difference in your gas purchase. In Forex your lot size will determine how
much in total you end up paying for the small differences in spread. So if you bought a standard lot of
100,000 units, you would pay the spread times 100,000.
So the spread for you if your Forex dealer gives you an ask price of 1.0009 and a bid price of 1.0004 is
0.0005. If you sell your units at the ask price you multiply that 0.0005 difference between the ask and bid
prices times your number of units which is 100,000 to arrive at a cost of $50 for the transaction. On the
other hand if you were dealing with a Forex dealer who gave you a tighter spread so that the ask price was
1.0008 with the bid price still at 1.0004 then your transaction would cost you 0.0004 times your lot size of
100,000 and your cost would be $40 instead.
Tighter spreads are better for Forex traders. When you are choosing your Forex dealer use the tips above to
determine how the spread will impact your profits and losses.
No comments:
Post a Comment