ForexGen | Spreads In Forex

Monday, December 1, 2008

Many online trading firms like to promote margin forex trading as an almost cost-free instrument - commission free, no service charge, no hidden cost, etc. Traders should know that spread is the cost of trading, and in fact, it also represents the main source of revenue for the market maker, i.e. the forex trading company. The spread may appear to be a minuscule expense, but once you add up the cost of all of the trades, you will find it can eat away quite a portion of your account or your profit. If you check the price tag of a T-shirt before you buy it, do the same thing when you trade forex, look into the spread before you decide to trade. Your trade needs to surmount the spread (the cost) before it profits.

Know your expense: the spread

pip Spread is the cost to a trader. On the other hand, it is a revenue source of the firm who executes the trade. In the foreign exchange market, the pip spread can vary a lot depending on the executing firm and the parties involve. Inter-bank foreign exchange can have as tight as 1-2 pips spreads, while the bank can widen the pip spread to 30-40 pips when dealing with individual customers. If you check out the pip spread of those small exchange shops nearby the tourists' sights, you may find the pip spread can go up to 400 to 600 pips.

Thanks to keen market competition, the pip spread of online forex trading is getting tighter in the past few years. For major online forex companies, their pip spreads are essentially the same. The table shows the typical pip spread of four major currencies of online forex trading at the time being:
Pair Spread

EUR/USD 2-3 pips spread
USD/JPY 3-4 pips spread
USD/CHF 5 pips spread
GBP/USD 5 pips spread
It is important for a trader to find the tightest pip spread as possible, but anything that is far lower than the typical pip spread is skeptical. The pip spread is the main source of revenue of a forex trading firm, if the firm cannot earn enough from the pip spread, there maybe some other hidden cost in the transaction.

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