What is a spread?

The spread is the term used in the Forex to refer to the difference between the bid and ask values of a currency pair. Since most brokers do not charge a commission fee for the trades their clients make, they make money through the spread instead by slightly increasing or decreasing the actual exchange rate.

 

The bid price, just like its definition, is the price a broker is willing to buy a currency pair from you if you are looking to sell. On the other hand, the ask price is the value a broker is willing to accept if you are looking to buy a currency pair from them. In order to make a profit each time you open a position, the ask will be larger than the bid most of the time.

 

For example, if the bid price for a currency pair is $1.6530 and the ask price is 1.6534, then the value of the spread is 4 pips, which is what you get when you subtract them. Traders should always be aware of the spread before entering a position and incorporate it in their strategies. In order to maximize your potential profits, look for the broker or currency pair with the narrowest spread. This ensures that you get to maximize your funds instead of big chunk of it going to the broker.