Considering the Spread

Filed under: Learn Forex Trading |

The spread, that is, the difference between the buy price and the sell price in the forex market (or indeed the stock market), is something that most beginner traders do not consider enough. If you are trading on higher timeframes, such as the daily timeframe, then the spread with probably only be one or two percent of the total of you risk. So this means if you are risking 100 GBP on your trade, then the moment you put the trade on you will be carrying a 1-2 GBP loss. This is, in effect, the cost of putting the trade on.

 

If you are trading the lower timeframes, then the spread is much more of a problem. For example, when trading the 1-hour charts, the spread could be as much as 5-10% of your risk. So if risking 100 GBP on a trade, you could be carrying a loss of 5-10 GBP straight away. And if you are making a lot of trades, this soon adds up. What this means is that you have to have a very good edge if you are trading off of the lower timeframes.

 

Now, once you go below the 1-hour timeframe, the spread really starts to be prominent. If you are trading a 5-minute chart with a tight stop loss, you really have to be a top, top trader. The spread will be a massive factor, and could have you carrying an instant loss of up to 50 GBP when risking 100 GBP! This is really too much. That is why I don’t trade on timeframes lower than the 1-hour chart. I think there are ample opportunities on the 1-hour, 4-hour, and daily charts and therefore it is not really necessary to look below these other than for confirmation perhaps. So beware the spread and always take it into account. It could be the one factor stopping you from being profitable.

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