Forex Spread Trading

If you are looking for a definition of Forex spread trading then the first thing you need to learn is that all Forex trading is spread trading! By the very nature of Forex, there would be no trading unless there was a spread because you are trading in currency pairs. The spread is the distance between those two pairs. For example if you were trading the USD (United States Dollar) against the GBP (Great British Pound), it is highly unlikely that both currencies would be worth exactly the same amount on the global market so there would necessarily be a ‘spread’ between the two.

Basic Understanding of Forex
In the beginning, Forex can be a bit difficult to understand because you are always trading two currencies at the same time. You will be buying one currency while simultaneously selling the other. A basic understanding of Forex spread trading is in relation to the value of each currency in the pair. You only want to buy a currency if you believe it will gain in value against the other currency in the pair. This, then, is Forex spread trading in a nutshell. However, you further need to understand that if the currency you buy does not gain in value against the counter currency at the moment you are conducting the transaction then you will have lost your entire investment. On the other hand, if it gains you will realize a profit – minus transaction fees of course!

How Forex Spread Are Calculated
So far nothing is too complicated. You can see that you are buying one currency, selling the other and the distance (difference in value) between the two is called a spread. That’s easy enough, right? Now it starts to get a little more complicated. The distance between the base currency (USD) and the counter currency (GBP) as mentioned above is a spread, but that spread is measured in pips (percentage in point). Here is where the math comes in. Currencies are quoted four places to the right of the decimal point so if you had an asking price of 1.1234 and the selling price is 1.1238 then the spread is 4 pips. Unfortunately, like any other rule, there is always an exception! The exception in this case would be the Japanese yen (JPY) which is only quoted two places to the right of the decimal point.

How Forex Spread Trading Works
Without getting into a ton of other Forex jargon, you can easily see that the larger the spread the greater your profit will be. That is, of course, if the spread is in the right direction. If the currency being sold has not gained against the currency being bought then the money you placed on deposit for the trade is a total loss. The truth of the matter is that Forex operates quite differently than other commodities so it will take some time to familiarize yourself with the inner workings of Forex spread trading. Nonetheless, the basic underlying principle is that the spread between the two currencies is the foundation of Forex trading.

Unlike any other market, Forex quotes are constantly changing throughout the day. As one global market closes another one opens. Therefore, currencies are in constant flux against each other. Once you get the hang of Forex spread trading you can find Forex robots which you can automate to do your trades for you when the spread reaches a certain point. You don’t need a huge initial outlay of capital and within a short time you can be realizing a profit. Forex spread trading is not a get rich quick scheme as profits are generally not huge but on the other hand, losses are not great either.

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