Revisiting the ‘Spread’

Filed under: Learn Forex Trading |

The importance of the spread is something that I have mentioned before, and it came up again today in my live trade commentary. A lot of beginners disregard the importance of the spread, but it is something that should not be overlooked.

 

To begin with, the spread will affect your entry and exit levels, and you must allow for it. First, you need to know what your charts are displaying (mine show the sell prices only). If it is the mid price, then you need to take this into consideration, and similarly if your charts show the sell or buy prices. If like mine, your charts are displaying the sell prices, then if you are buying, you will need to take this into consideration – as the chart will have to move below the level that you want to enter at to an amount equal to the spread.

 

Also, the spread greatly affects your profit/loss levels. The spread could eat up 5% of your profits per trade. Therefore, if you trade with a bank of $10,000, and you risk 1% of your bank per trade with a target of two times your risk, then over a series of 500 trades, your spread could account for $2500! This will have a significant impact on your trading capital in the long term, which is why it is important to a) find a reliable broker with low spreads, and b) to trade the higher timeframe charts where the spread is less of a factor.

 

The time of day also sometimes affects the spread, with it widening during periods of low trading volume, such as at night. You could overcome this by finding a broker with fixed spreads, but these are often high and might have some trading fees, so it is best to check out all of the options before making a decision.

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