Small Forex Spreads

Written by Jacey Harmon
Bookmark and Share

The cost of trading currencies is built into each trade as the market spread. The spread is the difference between the price a market maker is willing to buy a currency and the price a market maker is willing to sell. In order to make a profit, you must make up the spread between ask and bid prices. The narrower the spread the higher the chance you have to make a profit.

Finding Tight Spreads

If you plan on trading currencies and want to find the tightest spreads you need to stick with the major currencies. The major currencies are highly liquid, creating a highly competitive marketplace. A good rule of thumb is the more liquid the market, the tighter the spread. Concentrating your trading on the major currencies is the first step to finding tight spreads. The major currencies are: US Dollar, Euro, British Pound, Japanese Yen, Canadian Dollar, Australian Dollar, and Swiss Franc.

Generally, the spread for the majors will be around three pips. A pip is the smallest price increment for a currency. In most cases one pip equals .0001. Currencies are quoted with five digits and the pip is the last digit. In the case of the Yen, a single pip is .01. In extreme market conditions, known as "fast markets," the spread can widen significantly. In some cases the spread can be as wide as 20 or 30 pips in a fast market.

A majority of online currency dealers maintain spreads of at least three pips on the major currencies. They do not guarantee these tight spreads, especially in fast markets, but on average the spread will be around three to five pips. A three pip spread equals $30 for every $100,000 invested.

Bookmark and Share