In this video, you will learn about forex spreads, and, be able to choose brokers who offer competitive spreads.
In forex trading, you trade based on the value of the exchange rate between two currencies. For example, the GBP/USD pair. Here, the pound is the base currency, and the US dollar is the quote currency. It tells you how many units of the quote currency is needed to buy one unit of the base currency.
On your MetaTrader platform, the exchange rate that is given to you to buy the quote currency is the bid price. The price at which you are willing to sell the quote currency is the ask price. The bid is always lower than the ask and the difference is the spread. Spreads are measured by pips.
There are two types of spreads that the brokers offer.
Fixed spread:
The difference between the bid price and the ask price always remain the same, even during the times of high volatility. If you want to trade based on economic releases or during news events, then you can appreciate the benefits if a fixed spread. Otherwise, you will big expansion in the spreads offered by the broker, and it will cost you more in terms of pips to be given to the broker for each trade.
Variable spread:
The spreads fluctuate in correlation with market conditions such as liquidity and volatility. It can be as low as 1 or 2 pips during low volatility and reach as high as 50 pips during times of high volatility. Some brokers set a higher limit to decide how high the spread can be during these moments of high volatility.