In the world of trading, there is a term spread. For traders who will make transactions when trading forex, they will encounter the term spread. However, many do not know the meaning of forex spread, especially beginners who are just starting to trade and are still learning. Even for those who have often traded, the term spread is known but not fully understood. Therefore, to add references related to explanatory information about what spread is in forex, this article is here. The discussion will start from the meaning of spread, its types and its influence on the world of trading.

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What is spread?

Spread itself is a transaction fee that must be paid by traders given by the broker. This fee can make traders make transactions. In simple terms, forex spread is the difference between the selling price (bid) and the buying price (ask) of the currency value that we use in trading. To make it easier for us to understand the definition, we can take an example when we exchange money at a money changer. When exchanging money, we must adjust between the exchange rate and the buying rate, this is influenced by the currency value that is in effect when we make the exchange. The difference between the exchange rate and the buying rate is the spread in the context of money exchange. In the context of banking there is also the term bank spread.

Bank spread is the difference in bank interest rates that can determine the amount of the bank's income itself. The difference between the loan interest rate and the deposit interest rate. The definition of forex spread also has more or less the same understanding, the difference that we get from the selling price (bid) and the buying price (ask) when trading forex. The spread obtained is the profit obtained by the forex broker. So where can each trader get the profit? Let's take an example case, we trade forex with the EUR/USD position with a spread price of 1.4645/46. The bid price is 1.4645, while the ask price is 1.4646. If the two numbers are subtracted, then 1.4645 - 1.4646 = 1. The amount of spread from the EUR/USD forex trading case example is 1 pip. 1 pip is the cost burden that we must pay as traders to trade forex with the EUR/USD currency.
 
There is a price difference that is the obligation of every trader to be paid in order to continue the forex trading transaction. The EURUSD spread example above is also a simple example of how to calculate the bid ask spread. However, there are also other examples of spreads, to make it easier for us to understand. Because the spread itself consists of several types, based on different contexts, with examples or other conditions to make it easy to understand.

Get to know the types of spreads

The movement of the forex spread as reviewed in the example above is not something that is rigid, because its value can change at any time, based on the currency price. The fluctuating currency price is the main cause of the spread value being able to change suddenly. Because, the forex spread is the difference obtained from the selling price (bid) and the buying price (ask), when the value of the traded currency changes, the spread value will also automatically change.

As we can see in the example in the explanation of what is spread in forex before, from the initial value of 1 pip for EUR/USD, it can change to 2 pips, 3 pips or more, depending on the condition of the currency value. Each broker also usually has several account options for traders that have been adjusted based on the spread. Therefore, each broker also provides a special spread option for traders.

This can be done at the beginning when we register an account with the broker we choose. However, of course, we cannot just choose the type of forex spread, we must also understand each definition of the type of spread that exists and understand each difference. The following is a description of the types of spreads that must be understood in order to be able to trade forex smoothly.

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1. Floating spread

Floating spread refers to the value of the spread change according to market fluctuations. It is called floating, because this type of spread follows every price fluctuation that goes up and down. Therefore, the word floating is appropriate for this type. Floating spread is also the most popular type of spread given by brokers to use, especially for beginner traders who are still learning.
 
Therefore, the difference in value of the floating spread is very dynamic and can change at any time. This is also the disadvantage of this type, because it is unpredictable and full of uncertainty. Usually, to overcome these shortcomings, the planning made consists of various alternative calculations.

2. Fixed spread

The second type of spread is fixed spread. This type of spread is the opposite of floating spread. Due to stable trading conditions, fixed spreads tend to have stable values. This type of spread is an option for traders who are concerned about the risk of sudden changes. Some novice traders also use this type of spread, so they can make proper planning and calculations.

For us as a new and beginner trader, a stable and definite spread price calculation is an important start. However, for some traders this type of spread is less challenging because of the tendency of stable and safe prices. Because, unexpected ups and downs in the trading world are valuable experiences that can strengthen the mentality as a trader.

3. Zero spread

Zero spread is the difference in the spread value that is at 0 or zero. Zero spread charges 0 pips that must be paid by the trader to the broker. However, if the number of babies is 0 pips, then where does the profit come from for the broker? Here is the explanation, for those of us who are not familiar with this, of course, it is a big question. The first explanation, 0 pips in the zero spread type also means below 1 pips for some forex brokers. Such as 0.1 pips, 0.2 pips to 0.5 pips. So that means, zero pips is a term used for the spread value that is at a number below 1 pips.

Second, each broker sets a price or commission to traders when trading. The profits obtained can come from this, even though using the zero spread type, brokers can still make a profit. Especially, brokers who provide the option of zero spread will emphasize the commission that will then be received and agreed upon by each trader who chooses zero spread.

4. Spread variable

The last type of spread is the variable spread. This type has two tendencies, the first tendency will be at a low pip value while active in the forex market, which is around 1-2 pips. The second tendency, the spread value will increase, up to 40-50 pips, when active in the forex market. Therefore, this type of spread is considered more actual in following market trends and tendencies. However, just like floating spreads, it is uncertain which has a high level of difficulty in calculating and predicting. This type of spread is commonly used by traders who are experienced and have high sensitivity in reading forex market conditions.
 
The explanation above is the types of forex spreads that can be an option for those of us who will do forex trading. The next important question is how to calculate forex spreads? This is important to know, because with the spread formula we can calculate the spread for each type of spread that we will use in trading.

Spread calculation

In the previous discussion, it has been presented how to calculate forex spread briefly. Namely in the case of EUR/USD with a spread price of 1.4645/46. The bid price is 1.4745, while the ask price is 1.4746. If both numbers are subtracted, then 1.4645 - 1.4646 = 1. The amount of spread from the EUR/USD forex trading case example is 1 pip. Basically, how to calculate the bid ask spread is the spread formula or the spread formula itself. The formula for calculating the spread is:

  • Bid price – Ask price = Spread

To better understand it, let's take another example still using EUR/USD as an example. In EUR/USD forex trading, the spread price is 1.3404/1.13398. From this figure, the spread obtained is 0.6 pips. This figure is obtained by subtracting 1.3404 - 1.13398 = 0.00006 (to 0.6 pips, because the four numbers after the dot are removed in the pips calculation). To get the total cost figure that must be spent on the spread, we must multiply the value of 0.6 pips by the number of lots. If we trade 1 lot of EUR/USD with a value of USD 10,000, then the spread cost paid is USD 0.6. This figure is obtained from 0.00006 x 10,000 = 0.6 (in USD). The results above will change according to the number of lots purchased.

Factors that affect the spread

Changes in the spread are also influenced by several factors. Factors that affect the spread also play an important role in forex trading itself, related to each other and influencing each other. Here are some of the main factors that affect the spread in forex.

1. Currency value

The first factor is the value of the currency itself. Since the main thing in this context is forex or currency trading, the currency value is also the main factor that affects the spread itself. The rising currency value affects the spread itself, and vice versa.

2. Economic news

The second factor that affects the spread is economic news. Economic news can also make forex market conditions uncertain. Prices will experience tight fluctuations, especially if the economic news delivered is closely related to the conditions of the currency market itself. Especially if economic news delivers some information that can affect market volatility. Market conditions will be unstable, as will the spread itself.

3. Currency volatility and liquidity

The volatility and liquidity of a currency when combined with inappropriate leverage can end the trading activity being carried out. When we do high leverage, the spread costs required are also high. Therefore, the volatility and liquidity of the currency greatly affect the spread itself.

4. Trading volume

High trading volume can also trigger changes in the spread, either to a low or normal level. The higher the trading volume, the greater the change in the spread towards a low value, and vice versa. A low spread can be interpreted as a small difference between the ask and bid prices in the currency pair used.

Tips dan strategi penyebaran forex

Here are some forex spread tips and strategies that we can follow to achieve success in forex trading. The first thing to note is to be aware of the widening spread. As traders, we must spread wider and wider because it can result in higher trading costs. The spread of currency pairs can also greatly affect the widening of the spread. In order to avoid this, here are some factors that need to be considered to prevent this from happening:

1. Pay attention to factors that influence the spread

The following factors need to be considered because they will affect the size of the spread of currency pairs which also affects the spread itself:

  • Volatilitas: political events, economic news, and certain economic data releases can trigger widening spreads.
  • Likuiditas: Limited liquidity in the market can cause spreads to widen. Liquidity and volatility are two interrelated things. Illiquid currency pairs are the cause of volatility itself.

2. Choosing high liquidity forex pairs

Choosing a high liquidity currency pair is a strategy that is widely adopted by novice traders. Because, high liquidity currency pairs have low spreads. Here are some currency pairs that have high liquidity:
  • Euro Dollar
  • Dollar Yen
  • Pound Sterling Dollar, dan
  • Dollar Swiss Franc

3. Pay attention to trading time

One very important thing to note is also about trading time. By paying attention to trading time, we can enter the right spread strategy. We must pay attention to important times when trading takes place. During trading sessions in the main markets (London, New York, Sydney, and Tokyo time) forex spreads are usually at their lowest point with high trading.

4. Choosing a forex broker

Did you know that spread can affect profit in trading? Therefore, choosing a forex broker is important, you can choose a forex broker that offers low spreads. Well, unlike other conventional brokerage companies, GIC through the GICTrade platform provides a solution for traders who do not want to be burdened with high trading costs. So, what's so special about GICTrade? As a platform that brings together traders and market makers, you as a prospective customer can certainly choose between the two, namely becoming a trader or a market maker. GICTrade's role as a provider of transaction venues can minimize costs and help maximize profits for traders and market makers as well as create a fair transaction atmosphere and results. Traders will benefit from the absence of commission fees and swap fees and low spreads because of the market maker as a liquidity provider.

Conclusion

Based on the explanation above, we can conclude that the spread is the difference in value that appears which is the obligation of the trader to the broker in order to be able to trade forex. Based on the explanation of how to calculate the forex spread above, the spread price is very dynamic. Many factors affect the spread itself. There are also several types of spreads that can be used as options, which are adjusted to our conditions when we are going to trade.

Some brokers also usually provide a choice of spreads according to our conditions, whether as beginners or professionals. There are also several brokers with the lowest spreads that are used as choices. By knowing each component in trading, it also affects our success in trading itself, including understanding the spread strategy well.