Those who approach Forex often remain disoriented by the presence of terms they are unfamiliar with. Some terms, in fact, are part of specialist jargon and are not immediately understandable. Among these, spread stands out, which among other things is a concept directly linked to traders' hopes of earning profits. Here's what the forex spread is, how it varies, and why it's so important.
How the spread works
The spread is the difference between the real price and the price that the broker "proposes" (or rather, imposes) on the user. To understand this definition, it is necessary to clarify the functioning of market maker brokers. This type of broker receives an order from the trader and in turn operates in the real market. It is the broker who operates, not the user.
This service (and many others) are remunerated, precisely, by the spread, which can be defined, a bit crudely, as the "markup" (certainly more than legitimate) that the broker pockets. How that charge compares with an explicit fee is set out in commissions against the spread.
It is evident that the broker plays an essential role in trades as it is capable of eroding, at least partially, the trader's profit. If, for example, a trader earns 10 pips, but the spread is exactly equal to 10 pips, then they will find themselves with a profit equal to zero.
What Is a Pip?
Pips... What are they? Simple: the unit of measurement to describe spreads. Specifically, a pip is the smallest movement that an asset can generate.
How the spread varies
The spread varies based on many factors. First, the broker itself. Some brokers side with the client and offer very low spreads, thus directly facilitating them, as they limit the erosion that the profit necessarily encounters. A broker that offers very low spreads, and for this reason is appreciated by users, is XM.
The spread also varies depending on the type of account. VIP accounts often have lower spreads, an advantage that they offset with a decidedly higher entry level.
Spreads also change based on the assets. From this point of view, the broker proceeds with assessments that concern factors such as market liquidity. It is no coincidence that the Euro-Dollar exchange has very low spreads, which in most cases are reduced to 1 pip (which is the minimum possible).
Finally, it should be noted that some brokers offer variable spreads, which in this case change during the day based on market movements.
