Sep 25 2023

Are Forex Signals Worth it?
Forex signals are not worth it due to the fact that if anyone did develop a successful Forex Signal generator they should be using it instead of trying to monetise it by charging to provide signals.
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By Glen Carey , Updated on: Apr 07 2023.
A forex spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair, and it is essentially how a broker makes money without charging a commission on a transaction.
For beginner traders, it is important to understand how forex spreads work, how to calculate them and why they exist at all.
Here are some important questions to ask before you pick a broker:
Keep in mind, the spread will impact the cost of opening up any forex transaction.
But don’t worry, it is a lot easier to determine a spread than it seems.
To calculate a forex spread, all you need to do is subtract both bid and ask prices of a currency pair and the result will be the spread.
Here are a few examples using popular currency pairs:
This calculation applies to all currency pairs, whether they are major, minor and exotic.
Remember that when you trade forex, you will be charged the entire spread when you open a trade and that is precisely the reason why trades always open in minus, because the spread was charged right at the opening.
As mentioned above, traders who are just starting out need to consider the spreads that brokers offer, and do so closely.
Why? This ultimately will determine the cost you pay to trade foreign currency.
Brokers often offer commission-free trades as an incentive to attract customers onto their online trading platforms, which isn’t generally a bad thing, but they will build the cost of the transactions they conduct into their spreads.
Don’t be attracted too quickly by the offer of commission-free trades as then you can realise that a broker’s spreads are particularly high and you would have been better off with a commission.
Brokers have two main incentives for higher spreads.
It is important to find a broker that offers the most competitive spreads. If the spreads being offered are unreasonably or unusually high, then pick one that offers something better.
There are plenty of brokers out there that have reasonable spreads.
Broker | EUR/USD Spread |
---|---|
Dynamic - From 0 to 1.2 Pips | |
Dynamic - From 0 to 0.77 Pips | |
Dynamic - From 1 Pip |
Despite it being a smart way for brokers to make money from transactions, a higher spread can also reflect how risky your investment is.
A spread is often determined by the currency being traded, how volatile it is, the liquidity and market factors.
Keep in mind that the wider the spread between the bid and ask price, the higher the risk inherent in the trade. Conversely, the tighter the spread, the lower the risk.
To offset the risk, and unexpected costs, you can consider the type of spread that works for you, and there are two kinds:
Fixed spreads generally stay the same and are offered by brokers that operate as a market maker or a dealing desk.
The spread is always changing based on market conditions and is offered by non-dealing desk brokers, who get their pricing of currency pairs from multiple liquidity providers.
As we mentioned, external market factors can have a significant impact on forex spreads in either direction.
Here are a few to monitor:
Emerging market currency pairs generally have higher spreads compared to major currency pairs since they are less liquid and prone to greater political and economic uncertainty.
Conversely, major currency pairs – such as the EUR/USD or the EUR/GBP – have better spreads than exotic currencies, because they are considered more predictable investments in stable economies.
Just when you thought you understood how to determine a spread, there is another calculation you will need – that is the total cost of a spread.
Don’t be intimidated, it is only slightly more complicated than determining the spread itself.
Here it goes:
Spread in Pips x Lot Size = Spread cost
For example, if you are trading a mini lot of EUR/USD (10,000 units) and the cost incurred is of 0.0001 (1 pip per unit), the result will be $1.
As you embark on your forex trading journey, you will need to answer the questions mentioned at the top of this article.
This will prevent you from being overcharged by a broker, even if they are offering commission free trades, and provide some guidance against risky investment decisions.
Also, keep in mind that the higher the spread, the smaller the profit margin you will have for each unit that you are buying. Conversely, the tighter the spread the more money you can make off of your investment.
Alway remember that forex spreads are also impacted by market moving news, not just the broker’s incentive to profit off of a transaction.
Good Luck!
A Pip means the Point in Percentage.
Forex traders use Pip to define the smallest change in value between two currencies. This is represented by a single digit move in the fourth decimal place in a typical forex quote.
The bigger the spread, the bigger the Pip, then the higher the cost for the trader!
Spreads widen due to lack of liquidity and the last one happens due to major price swings, limit orders being removed and market participants not submitting market orders.
This causes market makers during their competitive battle for pricing to also widen their spreads to mitigate the risk of a loss while fulfilling orders.
Spreads will vary from broker to broker depending on these factors but there are no typical spreads. Definitely ask your broker about the spread they use on currency transactions.
It is the price of a domestic currency against another currency. It compares the value of one currency against the value of another. It is done so in pairs. These prices will change over time based on factors that affect currency prices.
While spreads can determine what broker you use, it doesn’t mean that they represent execution quality. It’s important to read reviews of the broker and test their system in order to judge their execution.
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