Spread is one of the trading costs in the Currency Market. A trader needs to take spread into consideration in order to make profit. Most of people forget to include this factor in their trading plan because they are too focus on the trading strategy and analysis.
Spread is defined as the difference between Selling-price (Bid price) and Buying-price (Ask price). The bid is the price at which forex broker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the forex broker is willing to sell the base currency in exchange for the counter currency. Forex broker or dealing desk make their living from spread on each trade position that being place through their network.
The Selling-price (Bid price) always lower then the Buying-price (Ask price). It may cause a trader to lose money, if the trader open and close his position at the almost the same time, with the same exchange rate.
Generally currency pairs with high volatility has tighter spread, while currency pairs with low volatility has wider spread. Apart from wide spread, currency pairs with low volatility usually have a lot of gap in price and is more difficult to identify the trend. For example, USDMXN.
Different dealing desk have different spread for each currency pair. Certain dealing desks write off spread but charge commission for each trade position. Then, there are dealing desks that apply spread and charge commission for each trade position. Some dealing desk offers fixed spread, but usually the spread is wider than variable spread. The advantage of fixed spread is straightforward profit and stop loss calculation during high volatility. The disadvantage is more costly during normal volatility.
However, lowest spread does not necessary mean that one dealing desk is a good dealing desk. To choose a good dealing desk or forex broker, one need to consider several factors like : does the company list on certain regulator agency, does the company have a good customer service, does the company have good reviews from their client, where are the offices, etc. How to choose a good dealing desk will be discussed in later article.