Brokers are known to charge their clients some commissions for using their platforms. This is known as spreads. Often, the spread charged by brokers could vary. Some brokers often charge higher spreads while some charge lower. There are also a few brokers offering zero-spread accounts that do not charge any spread. Most traders prefer using the zero-spread account as it helps them to determine their exact entry and exit points. However, a major disadvantage of using the zero-spread account is that some brokers charge extra costs when the trader closes his position. This work will help you learn how to calculate spread. You will also learn from this work the major reason why traders prefer a zero-spread account.
Meaning of spreads
Spread is the difference between the Bid and Ask price. It is the price at which the broker offers a given pair to the trader when he places a buy or sells order which is usually higher than the market price. The broker usually adds this extra cost as his commission for the services rendered to the trader.
The spreads charged by brokers usually depend on the pair traded. For instance, the spread for trading the major pairs such as EURUSD, GBPUSD, USDJPY, etc, is usually higher than those charged for trading minor pairs. Similarly, there is a higher spread for trading commodities such as XAUUSD, XAGUSD, and Crude oil.
Meaning of the Bid and Ask prices in spreads
Ask price: This is the price at which the broker delivers a given pair to the trader when he places a buy order. It is also called the offer price. The asking price is usually higher than the current market price by over one pip or more, depending on the type of pair traded.
Bid price: This is the price at which the broker accepts a given financial instrument when the trader places a sell order. Often the bid price is usually lower than the market price when the order is placed.
How to calculate the spread
The best way to calculate the spread is to subtract the Ask price from the Bid price. The difference between these two is seen as the spread. For instance, to calculate the spread for EURUSD with the Bid price as 0.99240 and the Ask price as 0.99230. The spread for this pair will be 0.99240 – 0.99230. This will give us 10 which is equal to 1.0 pip. This simple method can be used in calculating the Spread for any other currency pair in the market today.
How does spread affect the traders’ position in forex?
Generally, spreads are known to increase the price for buying and selling the different financial instruments in the forex market today. This reduces the trader’s profits. Spreads also reduce the trader’s available equity for trading, especially when the spreads charged for trading are high.
What is a zero-spread account?
A zero-spread account is a special type of account that has no spread attached to it. With this type of account, there is always no difference between the Bid and Ask price. This is because the broker offers the various financial instruments to the trader at the exact market price without adding any extra cost.
Why do some traders prefer zero-spread accounts?
Generally, some traders have always preferred a zero-spread account over other account types based on the fact that it makes it easy for them to calculate their exact entry and exit points. Also, the zero spread makes it easy to set an accurate stop loss and take profit target.