One of the things that all FOREX trading companies always brag about is that FOREX trading is “commission free.” That is true, FOREX trading companies do not charge a commission – BUT for the trader, there is a charge for each FOREX trade – it’s called the spread. When you enter a trade – let’s say a long trade. You have to pay the ask price. If you were to exit immediately you would have to pay the bid price. The difference between the two is the spread and it can be significant – depending on the pair being traded and the time of the day. Other factors also matter a bit on the short term, but the pair and the time of day are probably the two most significant factors affecting the spread.

Things are the same for a short trade – you get the asking price when you sell short but you have to buy back at the ask – that means you pay the same difference as a long trade.

The significance of this is quite simple – you have to consider the spread when constructing your trade. If the spread is 15 pips, you have to make 15 pips just to break even. Even worse, it price starts to move against your position immediately, you have to add that 15 pips into your stop loss considerations.

So a trader should look at the spread for any pair that he is trading, and be aware that the spread can change significantly when various markets open or close during the 24 hour trading day.

This information is ultra basic to trading – BUT it is one of the reasons so many traders ultimately lose in trading FOREX. Those spreads can really add up over time.

 

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