One of the key concepts in forex trading is the spread. The spread is the difference between the sell and the buy price of a given currency pair. The sell price is the rate at which the trader sells pair and the buy the rate at which the trader buys the currency pair.
The spread – the difference between the bid and ask price – is the cost of an individual trade. All traded instruments, whether commodities, stocks or currencies, have a spread. For example, when you see the price quote of EUR/USD is 1.2773/1.2776 it means that the bid is 1.2773 and the ask is 1.2776 which means that traders looking to sell have to do so at 1.2773 and those looking to buy must do so at 1.2776.
If a trader longs (buys) at 1.2776 and then shorts (sells) instantly, he will suffer a three-point loss and must wait for the market to move three points in his favor in order to break even. The trader begins to profit if the market moves four points in his favor.
The spread is a cost to the trader and the primary source of revenue for the company responsible for placing the trade. In the forex market, the spreads can fluctuate and in inter-bank foreign exchange spreads can be minimal, while the bank can often broaden the spread to 25-35 pips for private clients. As many tourists have certainly experienced, with some of the smaller currency exchange shops around the globe, the spread can go up from 300 to 600 pips.
With online forex brokers, the investor should ideally shop around for the lowest possible spread, but oftentimes incredibly low spreads should be treated with caution. Due to increasing market competition, the spread are getting tighter, but for major online forex companies, the spreads are by and large equally tight.