What is a Forex Spread in Trading (Part 2)

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Example of spread calculation

Brokerage fees with brokers are often expressed as a spread. Spread is defined as the number of points between the buy and sell price. On the financial markets, you have always 2 prices: the buy price and the sell price:

If the price of EUR/USD pair is 1.1200-1.1201, thatll mean the spread is 1 point.

The value of the spread paid in euros depends on the size of the contract that you are trading and on the point value by contract.

In Forex, for example, the point value by contract is 10 units of the second currency (For example : US Dollar in the EUR/USD pair). In the EUR/USD pair, the point value is US $10.

If the EUR/USD spread is 0.8 points and you trade a contract, your Euro spread is US $8 (with the point value of US $10) ; If you trade 10 EUR/USD lots, your spread paid in Euros will be US $80.

Example of spread on the DAX30 (German Stock Market Index) or CAC40 (French Stock Market Index) CFD :

On a CAC40 or DAX30 CFD lot, the spread is 0.8 point. The point value is 1 euro by lot. Therefore, the spread paid for a CFD contract is 0.8 euros.

Point values and contract sizes vary at different brokers. So you'd better verify if you are comparing the same things when comparing two spreads at two different brokers.

Factors that influence the spread in trading

What factors influence the spread in trading？

- Liquidity of the underlying financial instrument

- Market conditions

- Volume that traded on a financial instrument

Spreads depend on the underlying asset. The more an asset is traded, the more liquid its market, the more players are in that market and the tighter the spreads. In less liquid markets, such as the natural gas market, the brokerage fees are much higher.

Depending on the broker's offer, you can have fixed or variable spreads. Youd know that fixed spreads are often not guaranteed by brokers during market volatility periods or macroeconomic announcements.

Spreads vary depending on market conditions : There are larger spreads during macroeconomic announcements and most brokers dont guarantee spreads during announcements and volatility periods.

If you plan to trade during the European Central Bank meeting or while the Fed is speaking, you'd not assume that the fees will be the same as usual.

(To be continued ... )