How Forex Works (Session 7)
Spread
It is the difference between the bid and the ask price of a security or asset.
The larger the spread, the more difficult for you to break even. For example, if the spread is 2 pips as compare to a spread of 10 pips, you will have already make 8 pips when the later just manage to break even.
Forex is a de-centralized trading. It means that there is no such thing as the SGX or the NYSE or the CBOT, where securities has to go through the house through its brokers for a transaction to occur. Forex uses individaul brokerage house and therefore the rates differ from house to house at the same instant of time. That is at 1500hrs GMT, two differnt house can have different rate, different spread.
Spread is where the forex brokerage house make their money. The bigger the spread, the bigger their earnings. In addition, taking advantage of the rates and spread difference from other house, that brokerage firm can make more money.
Spread vary throughout the day. There is no constant spread throughout the whole day. Spread can widen during a hot news release and when the market is quiet.
For example, the spread is 20 pips for GBP/JPY for Oanda during weekend when the market is close. The spread close up to 10 pips when the Australian markets open. It close further to 7-8 pips when th Asian market open. The best spread happens during the European market at around 4-5 pips. But when ther is a news breakout, say BoE interest rate announcement at 1530hrs SGT, the spread suddenly widen at 1528 to 1532hrs to 10-20pips.
Of course, if you are trading by news and definitely not by the minute, the effect of widening spread will not affect you.
But the key note is that when chosing a brokeage house, chose one that give you a tight spread in the general trading time for the market you are trading.
Different currency pairs have different spread. At the same timing, EUR/USD has a spread of 0.9 pips for Oanda, while GBP/JPY has 4.5pips.
The reasons for this is voltality. The more volatile the pair, the more people play, the tighter the spread. The other reason is the price movement the pair can go per day. For example, EUR/USD can vary 100-150 pips on average a day, while GBP/JPY can go by as much as 200-300 pips a day. The term use is call range.
Assuming you did a buy GBP/JPY at 199.0 and set take profit (TP) at 200.0. The price climb to 200.0 and reverse. Your TP may not be reached. The reason - spread. At that moment, the bid and ask price may be 200.05/199.95 a 10 pip spread. Your 200.0 was not triggered, because the ask price failed to reach above 200.0. You will feel very very lousy, just miss by 5 pips and there goes a 100pips profit.
By experience, you may learn at times not to set the TP at 200.0. but 199.90. Earning less 10 pips but win the whole trade. Likewise, the price may swing above 200.0 and you earn 10 less pips - angry!
This are all part of trade - and spread is a tricky part. My advise is if you miss it, let it be so. The market will always be open the next day. Don't let emotions rule over you. By this, you have to experience it yourself. There are numberous occassions I miss the trade by less than a pip! Nothing to be too angry about.
If you are trading by news, you have to observe for yourself the widening of spread and know the spread by which your broker widen it. You can easily get yourself caught. For example, you set your buy at 210.0 and TP just 20 pips at 230.0 During the news, the spread widen and the price at 209.90/209.85 suddening become 210.0/209.80 a 5 to 20 pips spread. Your 210.0 will be triggered and even if the price goes up to 230.10, your TP may not be triggered, because the actual bid/ask is 230.15/229.95, still a 20pip spread. If the price reverse, you are really caught.
The worst is that if you set stop loss, you may trigger it! When the spread widen, say 210.0/209.8, it may trigger your buy at 210.0 and if your stop loss is at 209.8, it will also be triggered! Therefore if you need to know how spread behave during news announcement, in particularly if you are setting stop loss. (SL).
When will then the spread close up after widening? I termed it the rate of change of spread. And this again vary from broker to broker. The faster it close up the better.
Therefore understand how spread can affect your trade - especially TP and SL. The best way to understand spread is by observing and observing the broker using trading platform. Make sure you know this important working principle of spread.
In the next session I will teach on the fundamentals that affect forex movement.
It is the difference between the bid and the ask price of a security or asset.
The larger the spread, the more difficult for you to break even. For example, if the spread is 2 pips as compare to a spread of 10 pips, you will have already make 8 pips when the later just manage to break even.
Forex is a de-centralized trading. It means that there is no such thing as the SGX or the NYSE or the CBOT, where securities has to go through the house through its brokers for a transaction to occur. Forex uses individaul brokerage house and therefore the rates differ from house to house at the same instant of time. That is at 1500hrs GMT, two differnt house can have different rate, different spread.
Spread is where the forex brokerage house make their money. The bigger the spread, the bigger their earnings. In addition, taking advantage of the rates and spread difference from other house, that brokerage firm can make more money.
Spread vary throughout the day. There is no constant spread throughout the whole day. Spread can widen during a hot news release and when the market is quiet.
For example, the spread is 20 pips for GBP/JPY for Oanda during weekend when the market is close. The spread close up to 10 pips when the Australian markets open. It close further to 7-8 pips when th Asian market open. The best spread happens during the European market at around 4-5 pips. But when ther is a news breakout, say BoE interest rate announcement at 1530hrs SGT, the spread suddenly widen at 1528 to 1532hrs to 10-20pips.
Of course, if you are trading by news and definitely not by the minute, the effect of widening spread will not affect you.
But the key note is that when chosing a brokeage house, chose one that give you a tight spread in the general trading time for the market you are trading.
Different currency pairs have different spread. At the same timing, EUR/USD has a spread of 0.9 pips for Oanda, while GBP/JPY has 4.5pips.
The reasons for this is voltality. The more volatile the pair, the more people play, the tighter the spread. The other reason is the price movement the pair can go per day. For example, EUR/USD can vary 100-150 pips on average a day, while GBP/JPY can go by as much as 200-300 pips a day. The term use is call range.
Assuming you did a buy GBP/JPY at 199.0 and set take profit (TP) at 200.0. The price climb to 200.0 and reverse. Your TP may not be reached. The reason - spread. At that moment, the bid and ask price may be 200.05/199.95 a 10 pip spread. Your 200.0 was not triggered, because the ask price failed to reach above 200.0. You will feel very very lousy, just miss by 5 pips and there goes a 100pips profit.
By experience, you may learn at times not to set the TP at 200.0. but 199.90. Earning less 10 pips but win the whole trade. Likewise, the price may swing above 200.0 and you earn 10 less pips - angry!
This are all part of trade - and spread is a tricky part. My advise is if you miss it, let it be so. The market will always be open the next day. Don't let emotions rule over you. By this, you have to experience it yourself. There are numberous occassions I miss the trade by less than a pip! Nothing to be too angry about.
If you are trading by news, you have to observe for yourself the widening of spread and know the spread by which your broker widen it. You can easily get yourself caught. For example, you set your buy at 210.0 and TP just 20 pips at 230.0 During the news, the spread widen and the price at 209.90/209.85 suddening become 210.0/209.80 a 5 to 20 pips spread. Your 210.0 will be triggered and even if the price goes up to 230.10, your TP may not be triggered, because the actual bid/ask is 230.15/229.95, still a 20pip spread. If the price reverse, you are really caught.
The worst is that if you set stop loss, you may trigger it! When the spread widen, say 210.0/209.8, it may trigger your buy at 210.0 and if your stop loss is at 209.8, it will also be triggered! Therefore if you need to know how spread behave during news announcement, in particularly if you are setting stop loss. (SL).
When will then the spread close up after widening? I termed it the rate of change of spread. And this again vary from broker to broker. The faster it close up the better.
Therefore understand how spread can affect your trade - especially TP and SL. The best way to understand spread is by observing and observing the broker using trading platform. Make sure you know this important working principle of spread.
In the next session I will teach on the fundamentals that affect forex movement.
posted by Ernest Seng at 2:27 PM
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