EVERYTHING ABOUT FOREX
Spread is the difference between the bid and the ask prices of a security or asset.
Market participants do not purchase or sell the currency at one price. There is always the bid and the ask price for the currency traded at the market. There are practically no commissions at the Forex market, except for the price difference between the prices bid and ask, which is called the spread. Since the spread is the difference between the bid and the ask price, it is regulated in accordance with the currency pair chosen. When a new operation is opened a trader starts with the loss equal to the spread. This concept is also applied in the currency exchanges.
For example: Let’s assume that the bid price is 1.0593 when the ask price is 1.0591. The spread on EURUSD pair at the specified price level is 2 pips. Hence, on EURUSD pair a trading operation in 1 lot costs 2 pips.
The spreads may vary according to underlying market liquidity and volatility. In case of low liquidity the difference between the bid and the ask price (the spread) may rise. Before the release of important economic news, during the opening hours of the financial market spreads may be very dynamic.
Dynamic spreads is a standard concept at the FOREX market. Due to high volatility interbank market spreads vary according to the volume of trading operations. However, some brokerage firms applying fixed spreads may offer their clients fixed spreads on certain financial tools.
Generally, the spread known as a “currency gap” is calculated in "pips".
What is Lot?
Lot refers to the size of the trade carried at FOREX market. Trading operations are registered as lots in the system and the standard lot size is 100.000 units.
0.1 Lot = 10.000 units.
Example: When EURUSD is at 1.0693 a trader performing a buy operation in 1 lot which is 100.000 euros, sells 106930 USD.
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