DISCUSSION: IS LOW SPREAD GOOD FOR TRADING?
Spread is the main cost of Forex trading and traders must be familiar with this. But, what the spread is and how it affects your transaction success. Whether low spread is good for trading or not?. We will have the answers through this article. This is necessary to profiting from forex .
Definition of spread in Forex
The spread always exists in any market, and the Forex is not an exception. The spread fundamentally is the discrepancy of the price between the trader’s possible sale and purchase of the underlying asset. The traders familiar with stocks call it “Bid-Ask spread.”
What distinguishes high spread from low spread
Keep in mind that forex spreads can be variable during the day and running between “high spreads” and “low spreads”.
This is because spreads can be affected by many factors, such as liquidity or volatility. You may realize that the spreads of certain currency pairs (such as currency pairs of emerging markets) are greater than the main currency pairs. In comparison to the currencies of emerging markets, your main currency pairs are traded more, and under normal circumstances, higher trading volumes tend to result in lower spreads. These low spreads are ideally good for trading.
In addition, it is well known that before the major news events and between trading sessions, liquidity may be exhausted and spreads may expand.
The large discrepancy in the price of bid price and ask price is called a high spread. Basically, trading currency pairs of emerging markets commonly have higher spreads than the main currency pairs.
Above normal spreads usually indicate one of two conditions, namely, market volatility or low liquidity due to non-working time transactions. Before the news event or during the big shock (British Brexit, US election), the spread may be greatly expanded.
When a discrepancy in the price of bid price and ask price is small, we call it a low spread means that. It is best to trade when the spread is low, for example during the major forex trading hours. Low spreads usually indicate low volatility and high liquidity.
Pay attention to any adjustment in the spread
When the market is in a period of uncertainty, all news can lead to sharp fluctuations in prices. When calendar events occur, the prices can rise or fall sharply depending on whether expectations are met. The liquidity providers will not know what the outcome will be like until the event takes place. To ensure their risk, they are forced to widen the spread.
Margin calls can be caused by spreads
You can get out of your place or get a margin call if you currently hold one position and the spread dramatically increases. Only by restricting the number of used leverage, you can secure yourself during periods of spread expansion. Because low spread is good for trading. During times of spread expansion, it is also often useful to pause trading until the spread becomes smaller. Next, learn about all the types of forex brokers.