Learning Board

Back to Courses

Forex Trading For Beginners (Full Course)

Lecture 5: What Are Spreads In Forex? (EVERYTHING YOU NEED TO KNOW)

Overview

In Forex, the "spread" is the difference between the bid (sell) price and the ask (buy) price. It serves as the broker's fee for facilitating trades. Understanding spreads is critical because they can cause trades to be closed prematurely or impact your entry price, even if price action doesn't visually touch your stop-loss or target lines.

How Spreads Impact Your Trading

1. Entry Slippage

When you execute a market order, you are filled at the price plus (or minus) the spread. This means your trade starts in a small negative position relative to the current chart price.

2. Premature Stops

If price action moves near your stop-loss, the spread can trigger your stop-loss order before the visual candlestick or wick actually touches your stop line on the chart.

3. Target Execution Issues

Similarly, price must travel slightly further than your target line to account for the spread, otherwise, your take-profit order may not be filled.

Minimizing the Negative Effects of Spreads

  • Trade Higher Timeframes: Spreads have a negligible impact on long-term swing trades where target distances are large compared to the spread.
  • Select Low-Spread Pairs: Stick to major currency pairs (like EUR/USD) which typically offer tighter spreads compared to exotic pairs.
  • Avoid Volatile Times: Avoid trading during periods where liquidity drops and spreads widen, such as 4 PM to 9 PM EST.

Ready to test your knowledge and earn rewards?

Take Quiz for 5 Points!

Course Modules

TX

Loading activity...

Just now