What is Forex Spread and Does it Matter?

Forex traders may know what is forex spread. It is the difference between the price you buy and the price you sell a currency pair. And how brokers make money.

What is Forex Spread Cost

Those who may not know what is forex spread cost, it is simply the total cost of the charge incurred through the price gap, when dealing currencies online. This is how brokers make their money, in order to stay in business. Spreads in general are of little concern to most traders, because they tend to be tight, and the amount charged is negligible compared to trade size. Those who trade at very high frequency and know what is forex spread long term cost, may become concerned. In most forex trading strategies traders are open minded and look at the big picture. But some penny wise – pound foolish traders do make quite a fuss about spread cost. And even more about widening spreads. Which is a normal phenomenon during volatile times. However, it is wrong to focus too much on spread cost. Many trades eventually blame their own failures on their brokers, and the charges they incur. But if a trader is doomed to fail, they will fail anyway. So brokers with high commission charges are not the cause of failure. And in fact, some high commission brokers, with the highest spreads and possibly extra charges, may be better than others. That is because they deliver better on trade filling price. It is definitely wrong to judge brokers based on dealing cost alone. Nonetheless spread cost is important to traders such as scalpers and other high frequency traders. But even in that case, one has to compare dealing costs versus filling price, and overall efficiency.

What is Forex Spread as an Indicator?

You might not know what is forex spread as an indicator. But widening spreads do signal volatility and increased risk. Unlike stocks, where risk hints downside. Currency risk works in both directions. So widening spreads simply mean more volatility is expected. And traders should pay attention. Anyone who knows what is forex risk and volatility, should watch spread size on important pairs such as EURUSD. Forex charts do reveal how brokers sense market risk, and how they deal with it. By looking how spreads widen or contract relative to where price is on the currency chart. Brokers are very knowledgeable about various markets. And their concern may provide warning about coming volatility. Long before anyone in the media notices. The forex spread indicator works better with stocks. If spread costs increase suddenly, there is high risk that the stock will go down. Or at least that it will trade in a wild way, where short stops, or even medium size stops will not work. That’s about as far as you should be concerned about spread costs, and see them as an indicator and not as an obstacle to trading success .