If you’re just starting to learn forex trading, then you might not know what a bid/ask spread is.
It’s actually quiet simple: it’s the difference at which a broker is willing to sell a currency for you and at which he is willing to buy a currency from you.
You probably already know that in forex, brokers don’t take commissions. But they still make money from their brokering services, because they sell currencies just a bit more expensive than they buy them, and they buy them just a bit more expensive than they sell them.
So for example:
Brokerage firm BrokeBrothers might be selling you one Euro for 1.213 US-Dollar. But if you want to sell your Euro’s to them, they’re not going to give you 1.213 US-Dollars for it – instead, they’re going to give you just 1.209 US-Dollar for it.
Notice the 0.004 price difference? That’s what the brokerage company is making their money with. And that’s called the “bid/ask spread”.
So what do you think is better for you? A big bid/ask spread or a small big/ask spread?
For you as a trader, a smaller bid/ask spread is better, because it means that you can keep more of your money instead of giving it to the brokerage firm. For the brokerage firm, a bigger bid/ask spread is better, because it means that they get more money from you for every transaction.
When you look around, you might notice that some companies have a larger big/ask spread then others. In general, that’s not good. Small bid/ask spreads are way better for us traders.
However, it’s not the only thing we should be looking at when chosing a broker. Some companies have gotten quiet tricky by making it seem as if they are good for traders because of low bid/ask-spreads, but they end up being more expensive because of other things they’ll do.
(We’ll cover those sneaky tricks in the future).
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