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How to Understand Forex Trading Spreads

In the forex market, the trading spread is the difference between a currency purchase price and its sale price. With this guide, you'll learn how spreads can affect your trading profit margin.

Instructions

  • Step 1: Know common forex terms used for spreads Know common forex spread terms. "Currency pair" compares prices between two currencies. A "pip" is the smallest increment in a currency pair spread, or $0.0001.
  • Step 2: Learn how spread quotes are listed Learn how spread quotes are listed. A CAD/USD quote is listed at 1.0434/0431. If you sell $100 CAD, you get $104.34 USD. If you buy $100 CAD, you pay $104.31 US.
  • Step 3: Be aware of dealer spread profits Be aware that most dealers make profits by widening trade spreads. They sell currency at a price they determine and also buy at a determined price.
  • TIP: Dealer spread-width factors can include a transaction's size, market volatility, or the dealer's position on a specific currency pair.
  • Step 4: Know when currency spread-widths are narrowest Know when currency spread-widths are narrowest before buying or selling. Times are usually in the New York morning and European afternoon.
  • FACT: Since 1981, uncut sheets of currency from the U.S. Bureau of Engraving and Printing are available for purchase.

You Will Need

  • Internet access

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