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Forex Transaction Costs : Spread


In any Forex trade, there are two rates that are applicable depending if the trader is buying or selling a currency pair. If he is selling a currency pair, he will request for the “Bid” price of the currency pair. Conversely, if he is buying a currency pair, he will then look at the “Ask” price of the currency pair. The Ask price will always be higher than the Bid price.

Nevertheless, the trader will never be trading exactly at the market rate. Because there is no commission payable in Forex trading, he pays what is known as the “Spread” to the broker.

As mentioned earlier, this is the difference between the Bid and Ask price. The spread is only applicable on the buying side of the transaction. The trader will not incur this cost when he is selling the currency pair. In other words, the spread is a round turn cost.

In trading terms, what this entails that any starting position is a loss making position for a Forex trader until he accumulated some profits to cover the spread of the transaction.

Thus, if a trader takes a market position at the Ask price and immediately closes his market position at the Bid price, he will then incur a loss exactly equal that to the Spread.

Floating Spread Type Account Contest here

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