What is Spread in Forex?

Types of Spreads

The spread can take various forms, each calculated differently:

• Bid-Ask Spread: This is simply the difference between the ask price and the bid price.
• Yield Spread: The difference in yields between two securities, such as corporate and government bonds.
• Credit Spread: The gap between the yields of a corporate bond and a government bond, reflecting the risk premium.
• Option Spread: The calculation varies based on the specific strategy used.
• Intermarket Spread: The difference in price between two commodities.
• Time Spread (Calendar Spread): The difference in premiums between options expiring at different times.
• Futures Spread (Intra-market Spread): The difference in price between futures contracts expiring at different times.
• Basis Spread: The difference between the spot price of a commodity and the price of a futures contract.

Understanding Spreads

Spreads are influenced by several factors:

• Market Factors: Liquidity and volatility are key. Higher liquidity leads to narrower spreads, while volatility can widen them.
• Broker-Specific Factors: Different brokers have different pricing models, which can affect spreads.
• Trade Characteristics: The size of an order and the type of order can also influence the spread.

Fixed vs. Variable Spreads

• Fixed Spreads: These offer a constant difference between the bid and ask prices, regardless of market conditions. They are predictable and transparent, making them suitable for beginners and risk-averse traders.
• Variable Spreads: These fluctuate based on market conditions, offering potential lower costs but also unpredictable trading costs. They are better suited for experienced traders who can handle the variability.

Low Spread No Commission Forex Brokerage

Traders often look for brokers with low spreads and no commissions to reduce trading costs. Brokers like Tickmill, CMC Markets, IC Markets, Pepperstone, and XM offer such models, with varying spreads and commission structures.

Spreads vs. Commission

• Spreads are the market cost for executing a trade, reflecting the difference between the bid and ask prices.
• Commission is a fixed fee charged by the broker for facilitating the trade, independent of the spread.

Spread in Option Trading

Option spreads involve buying and selling multiple options contracts simultaneously. They can be vertical, horizontal, diagonal, butterfly, condor, or ratio spreads, each with its own strategy and purpose. These spreads are used to manage risk, capitalize on price differentials, and generate income.

By understanding and managing spreads, forex traders can make more informed decisions and potentially improve their trading outcomes.