Online Forex Trading Info

Forex is priced in relation to the currency rates between two different countries. When you make a deal in Forex, you buy one currency and sell another at the same time. You must buy/sell the opposite position, if you want to exit the trade. For instance, if you think the price of Euro is going to rise against the US Dollar.

For example, you decide to buy Euros and sell US Dollars. If you wish to exit the trade, you will have to sell Euros and buy back US Dollars. Your hope is that your expectation was right and that the exchange rate for EU/USD has actually risen, meaning that you will get more Euros back than when you bought them, and this way you will make a profit.

The claim of every Forex broker is that he is having the tightest spreads in the industry. For a beginner, the topic of spreads in the Foreign Exchange market is very confusing and often very difficult to understand. However, it is to be noted that nothing affects your trading profitableness more.

The first thing you need to know is what the spread actually means. A spread is the difference between the price you buy at and the price you sell at that is quoted in the pips. If the quote between EUR/USD at a given time is 1.2222/4, then the spread equals 2 pips. If the quote between the two currencies is 1.22225/40, then the spread equals 1.5 pips.

The spread is what helps brokers to earn money. Wider spreads will cause a higher asking price and a lower bid price. The result is that you have to pay more when you buy and get less when you sell, making it hard to earn profit.

Very often, brokers don’t earn the full spread, particularly when they hedge client positions. The spread helps to compensate for the market maker for accepting risk from the stage it begins a client trade to when the broker’s net exposure is hedged.

The importance of spreads is that they affect the return on your trading strategy considerably. Being a trader, your chief aim is to buy low and sell high as in the case of futures and commodities trading. Broader spreads means buying higher and having to sell lower. A half-pip lower spread need not necessarily sound like a good deal, but it can be the difference between a fruitful trading scheme and one that isn’t so.

If the spread is tight, better things will happen for you. However tight spreads are significant only when they are paired up with good execution. Quality of execution will determine whether or not you actually get tight spreads. A good illustration of this is when your screen displays a tight spread, but your trade is filled a few pips to your disadvantage or is cryptically rejected.

When this happens again and again, see whether your broker is showing tight spreads but is delivering wider spreads. Some brokers use strategies like delayed execution, rejected trades, stop-hunting and slipping to do away with the promise of tight spreads.

Part 2 of this article is available here