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Why do brokers charge you against every trade you open? It’s true that you pay the cost of every trade in the form of a spread to your broker. You might have heard of commission-free brokers. How do they earn if they don’t charge commission?
They earn through the charging spread. What is spread? Why do you need to pay it in forex?
Read this post to know the answer to any question related to paying the spread.
Go through the quick answer of: When do you pay spread in forex?
Spread is not paid directly. It is automatically deducted from your profit against every trade. However many brokers like CFDs will deduct the entire spread upfront. While some brokers can also manipulate spreads to charge you more cost.
How much spread you will pay depends entirely on the broker you may choose. Do proper research and inquire about the variable or fixed spread mechanism before choosing a broker for you.
What Is Spread In Forex & Why You Need To Pay It
Let’s know about what is spread in forex?
Spread is the difference between the bid (sell) and ask (buy) price of the currency pair. A bid is the selling price of the base currency pair, whereas an ask is a price you would use to buy the base currency.
You can see base currency on the left side and quote currency on the right side. The difference tells you how much quote currency is equal to one unit of the base currency.
Spread is measured in Pips, which is a smaller unit of price movement in currency pairs.
Now the question may arise in your mind: why do you need to pay spread in forex?
Spread is the cost of each trade you place. Most of the currency pairs are traded without commission. But you have to pay for the spread. All leveraged trading providers or brokers charge spread. In a commission-free system, brokers earn through charging the spread.
When Do You Pay Spread In Forex
Do you play spread right after opening the trade? Or do you pay spread when you close the trade? When do you pay spread in forex? It mainly depends on your broker.
For CFDs, you will pay the entire spread upfront. Normally your broker will charge it when you open the trade. For long-term pending buy orders, you will have to add the spread.
For smaller positions, the spread will be deducted right after opening the order. But for long-term orders, you will add it keeping in mind “the market price” For long-term trades, you will be charged higher. Moreover higher spread is a sign of illiquid market conditions.
If you open the position and close it immediately before any movement in the Bid price, you will pay the Ask price when you bought it and the Bid price when you close the order. You will pay spread once not twice.
Do You Pay The Spread On Both Sides Of The Trade
Do you pay the spread both at the opening or closing position of trade?
NO, it depends on your broker. Mostly CFDs or spot brokers, the entire spread is charged upfront. But some ECN brokers can manipulate spreads by charging both open and close costs.
It’s illegal to charge a higher spread. Some brokers take advantage of the time frame and do tactics. They do this especially when markets are closing for the weekend or illiquid.
You might have observed the spread rising higher at 10.PM. This is the moment when brokers try to cheat traders. That’s why it’s not advisable for fresh traders to place an order at this time.
Do You Pay 2x Spread For Each Trade
Scenario: You opened a trade and closed it immediately. You closed before any bid price movement.
Will you pay double spread at both closing and opening trade? During nighttime especially, the spread tends to be higher? Why?
When banks are closing the day and shifting transactions from one center to another, the spread tends to be higher. This time traders are mostly confused as to whether they pay the double spread or 2x spread.
Basically, it depends on the system showing the price when you place the order. Some brokers always show both bid and ask prices when you put SL and TP. If you work with these brokers you can avoid such misunderstandings of paying double spread cost.
Do You Pay The Spread Twice
If you understand the spread you will come to know that you don’t just pay it. It reduces your profit from the position once at closing time.
It is automatically deducted from your profit of buying and selling price difference. However, it depends on your broker too.
Many spot brokers will charge spread upfront. But there are brokers who manipulate spreads to charge it in both closing and opening positions. Such brokers use tactics of not showing bid and ask price when the spread gets double.
It all depends on how your broker displays the bid and ask price. Do proper research before opening the account to any broker.
FAQ
What Is Good Spread In Forex?
Normally the good spread of currency pairs is between 1 to 5 pips. But it can change at any moment regarding market conditions. A higher spread means low liquidity. The lower the spread the higher the liquidity in the market.
What Is A Spread Fee?
The spread fee is the cost or commission of every trade you open to the broker. In other words, the spread fee is equal to the difference between the buy and sell price of the currency pairs. It can change at any time.
How Is Spread Calculated?
Spread is calculated in Pips. To calculate spread you will have to subtract the bid price from the asking price. For example, if you are trading EUR/USD at 1.8009 to 1.8007. The spread is calculated as 1.8009-1.8007 that is 2pips.
Closing Lines
Lastly, paying spread is essential. Every broker has his own rule of price execution and paying a spread. Some brokers charge it upfront. While other brokers deduct spread from the profit at the time of closing trade.
There are few scam brokers also who try to manipulate the spread. Such brokers may charge you double spread at long-term positions. Beware of such brokers. Happy Trading!
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