No trading activities should be conducted without a well-thought-out strategy in mind. A strategy depends on many factors, which, in turn, are associated with the particular field in which a trader is involved. If you are dealing with Forex, one of the most significant things you need to keep in mind is the spread associated with an operation you conduct.
In the most general terms, spread as a trading category may be defined as a difference between the price for which the trader acquires currency and that for which he or she is selling it (bid price and ask price, respectively). It is an integral part of every Forex transaction, even if this difference is slight and insignificant.
To better understand spread in the context of Forex, you may consider an analogy of a simple market transaction with the involvement of any other asset. Let’s imagine that you’re purchasing a car. Let’s complement this example with one significant condition: the car prices fluctuate as regularly as currency prices in the exchange market. In such a case, you buy a car for a particular price. If, after the acquisition, you are willing to sell the car, the sum of money you’ll get for it will already be different. The difference between the price for which you purchased the vehicle and that for which you are selling is the same thing as the spread is in the context of Forex.
Market Makers’ Role in Determining a Spread.
A significant peculiarity of the forex market is its virtual character. Unlike many other exchange platforms, forex sessions have never been held live, resorting to virtual space. Therefore, it always needs the involvement of agents who facilitate the trading operations, considering that it may be difficult for counterparties to find common ground. These facilitators, who serve as intermediaries between the parties, are known as market makers. To make things clearer, keep in mind most market makers are brokerage agencies.
Market makers are responsible for the smoothness of the operations and satisfaction of the parties’ demands. At the same time, having the full scope of information about the transaction, they are granted with all the capabilities to determine the scope of the risk that may emerge in case if, for example, the price for the asset rapidly increases after the bid has already been accepted and before the buyer was found. In such cases, market makers can suffer losses. However, they also have high chances of directly benefiting from the spread, in case if the asking price is higher than the bid price to a significant extent.
Minimizing the Risks Associated With Spread.
In order to secure your profits from forex trading, you need to take measures to minimize your spreads. In turn, there are several ways in which you may reach this objective. First and foremost, you may approach your choice of trading hours with more thoroughness, selecting the time frames when the number of counteragents on the exchange platform is the highest. In such a situation, spread often narrows down to the minimal indicator that does not have an impact on the traders’ profit.
Another recipe for painless trading with minimal chance of increased spread is refraining from dealing with thinly traded currencies. When you exchange frequently traded couples, such as EUR/USD, you decrease your risks since there are many market players dealing with them and, hence, many potential buyers of your asset. In turn, more “underground” currencies limit you to a much smaller scope of market makers with whom you can interact. Hence, you have fewer counteragents, which creates the risk of increased spread. Essentially, this principle can be formulated in the following statement: the lesser competitors you have, the wider spread you risk to face.
Bottom Line.
For forex traders, it is impossible to avoid spreads at all. These are the essential elements of their operations. However, they still can minimize the spreads’ impact on their profits. You need to understand the essence of spreads and the mechanics of their formation to consider this factor in your trading strategy. Although this article contains general provisions on spreads, if you want to succeed, you should constantly develop your knowledge and skills in the field of trading. Fortunately, today, everyone can obtain a wide range of information on forex trading strategies on various online platforms. For example, through the link https://nsbroker.com/investment-strategies, you can reach numerous tips and tricks on different aspects of forex trading. Do not hesitate to get acquainted with them and remember: no matter how many assets you possess, the main resource with which you operate this knowledge. Do not forget to replenish it regularly.
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