The Forex market is one of the most mysterious markets in the world. Even after knowing all the different kinds of trading strategies, the traders fail to earn money due to emotional attachment to their capital. At times, traders become blind with greed and forget all the basic rules and start trading with high risk. In this article, we are not going to discuss a professional trading strategy. We will highlight the importance of the basic term, the spread used in the Forex market.
Spread is the difference between the bid and the asking price. The bid price is the price at which the broker is willing to buy the asset and the asking price of the selling price of the broker. If you closely notice the big and ask price of a certain asset, you will find a few pips gap. This gap is commonly known as the spread and it is the prime method by which the brokers earn money.
So, how it can affect our trading performance?
You might be wondering that the spread has nothing to do with your trading career. But in reality, the spread is the most basic term you must understand to improve in trading. It will optimize your trading cost and make you a better trader. Let’s say, you have executed 100 trades in 30 days. If the average spread is 3 pips and for each pip, you are paying $10. So, for the 300 pips, you will be paying $3000 to the broker in a single month. Of course, we are talking about the standard 1 lot trade size for the pip value. Just with the help of a tight spread broker, you can’t cut down the trading cost by half. For this reason, the skilled traders in Hong Kong love to trade the market with an elite broker like Saxo who always offers a tight spread trading environment.
Spread widening is the result of a significant gap between the bids and ask price. Usually, you find such market conditions during the major news. But if you trade with Saxo capital markets, the spread gap will not be insane. A high-end brokers always try their best to ensure the best trading environment so that their clients can earn more money when trading the real market. Even if you trade major news like NFP you might not have to face more than 5 pips spread in your trading account. But if you trade with an unregulated or scam broker, you might even experience 20+ pips spread. Things are really hard when you ignore the importance of spread at trading.
Calculation of the profit
Naive traders never consider the spread costs. Thus, they never know what their trading cost is. Trading is a business and if you fail to calculate your base cost, it will be tough to optimize your trading environment in the most efficient way. Some of you might say, you will be using the fixed spread broker, because you know that a fixed spread broker always charges higher fees to retail clients. At the end of the year, you might end up with big costs associated with trading. So, try to trade with a variable spread broker so that you don’t have to big spread cost over the period of time.
By now you should have a clear idea of how a small term like spread can affect your trading performance. So, if you believe trading is the right profession, make sure you give emphasize the minor details of the market. In fact, nothing should be considered as a minor detail when you become a fulltime trader. Give importance to the essential trading parameters so that you can earn money without losing a significant portion of the capital. If you can use the tips in this article, you can easily cut down your trading costs.