What Is Spread In Online Forex Trading?
Spread is an important term in the field of online forex trading and the foreign exchange market. While earlier the forex broker websites used to earn from different means, nowadays their primary income is through the spread.
In simple words, the spread is the difference between the buying price and the selling price of any type of currency. When online forex trading takes place between two traders, forex broker websites make sure that there is always a difference between the price asked by the seller and the price offered by the buyer. This way, forex broker websites can earn a small portion of the trade through the spread.
In online forex trading and the foreign exchange market, there are specific terms used for the selling price and buying price of different types of currencies. The selling price of the currency is called a bid. This is the minimum price that the seller wants in exchange for currency.
The buying price of the currency is called ask. It is the maximum price a buyer is willing to give in exchange for a specific currency. If a forex broker website wants to make a profit, the bid and the ask can never be equal. Otherwise, the forex broker website cannot earn from such trades.
Types of spread in the foreign exchange market
Generally, there are two broad categories of spread in the foreign exchange market. The first category is variable spread. Some broker websites offer variable spreads to traders. It is done to ensure that no loss occurs in the trade. A variable spread also reduced the market risk of a trade.
To make a spread variable, the forex broker website increases the amount of spread. It is done to avoid loss in case some fluctuations occur in the foreign exchange market.
Another category is called a fixed spread. A fixed spread does not change irrespective of the fluctuations of the market. Thus, even if the market falls or rises, the spread taken by the forex broker website will remain constant.