The Bid-Ask Spread - What Forex Traders Should Know

In forex trading, trades are commission-free; meaning there are no brokerage, exchange or market-maker costs of buying or selling. The brokerage firm benefit from the difference in bid-ask spread. Bid-ask spread is one of the forex basics that every beginner traders should be thorough.

In trading any financial instrument including currency, stocks and bonds, ask is the lowest price the seller willing to accept and bid is the highest price the buyer offer. The bid ask spread is simply the difference between the two. Market liquidity is the main factor determining bid-ask spread for an instrument. Usually the high the liquidity is so narrow the spread. That is why most traded currency pairs like EUR/USD have very tight spreads and exotic pairs have very relaxed spreads.

The bid-ask spread can be calculated from the pip difference of the currency pair. Fore example a EUR/USD quote of 1.3790/1.3792 shows a 2pip difference. Brokerage firms can offer fixed spread for trading specific currency pairs, or can offer different spread according to the liquidity of the market, or can offer fixed spreads when there is liquidity and custom spread on less-liquidity.

This blog is written for Orient Financial Brokers, a leading forex currency broker in UAE offering advanced forex trading software and a range of account features.

Things a Beginner Forex Trader Must Know

Unlike the past where most of the forex market players are large financial institutions, now retail traders contribute significantly to forex market volume. But making out a career from forex trading is not that easy. A beginner forex trader should be aware about some of the basic forex trading stuff.

1. The uniqueness of FX market: Forex is the largest, most liquid, most wide, continuously traded, uncontrolled and unregulated financial market of this planet. There are no short-trading restrictions, insider trading rules or position size limits.
2. Commission Free and Bid-Ask Spread: In forex market, there are dealers not brokers. The bid-ask price difference is the cost of trading against the dealer.
3. Pip: Pip or percentage of point is the smallest change in currency pair exchange rate. Generally it is the change in fourth decimal point of the value.
4. No physical exchange: All retail forex trades are mere computer entries. There are nothing sold and nothing bought. The profit or loss of every trade is entered in respective accounts. Actually unlike stock market every FX trades include buying one currency by selling other. That is both long and short trades in one transaction.
5. The major currencies: The major currencies and popular pairs made out of them accounts for more than 95% of forex market transactions. These currencies include USD, EUR, GBP, JYP, CHF, AUD, CAD and NZD.

This blog is written for Orient Financial Brokers, the leading online forex trading broker in Dubai, UAE. Learn more about OFB forex trading service.