Understanding Spreads

The easiest way to grasp the concept of spreads is to take a look at the displays of the exchange kiosks at your airports or urban centres.  As a tourist, you will know that the price at which they sell you foreign currency can be vastly different than the price at which they buy it back.  This difference in those two prices is called the Spread.

As traders on the Valutrades MT4 or MT5 platforms, we too have to consider the spreads, but fortunately, they are not as wide as those of the exchange kiosks! 

In some cases, they are actually zero "0.0" for Valutraders.

In the case of the graphic above, the spread on EURUSD is a tiny 0.1 Pips.  You will see in the MT4 Market Watch, just above EURUSD, that GBPUSD also has a spread of 0.1 Pips. 

Tight spreads like this are a function of high market liquidity.  This basically means that there is a lot of activity on these two pairs and the market liquidity providers, even with a lot of competition, can offer better rates to Valutrades.

Valutrades uses an ECN (Electronic Communications Network) which gets the best Bid and Ask prices instantly, from various liquidity providers.  Hence the great spreads.

As you scroll down the list of symbols in your Valutrades MT4 or MT5 Market Watch, you will note that the more exotic the instrument, the higher the spreads.  Again, with less liquidity and less popularity, the spreads will be wider.

Why is this important?

Your style of trading will dictate the Symbols you may trade, based on the spreads.  For example, if you are a Scalper (opening and closing trades within seconds) you will want to trade only the most popular pairs like EURUSD, USDJPY, USDCAD, Gold (XAUUSD), and a few others.  The first job of your trading strategy is to "beat the spread" and this is critical in scalping...and to do it quickly.

Intraday trading will give you a wider variety of Symbols from which to choose as you may need many minutes or hours to beat the spread.  This is not a problem if your position will be open all day.

If you are a Swing Trader (with positions open many days) or a Position Trader (with positions open many weeks and months) you may trade almost anything.

So, for example, if you see a great opportunity between the UK Pound and the South African Rand (GBPZAR), you probably won't want to trade it on a lower time frame.  However,  at higher time frames, and longer position durations, you will have a better chance of beating the spread and, therefore, more chance of success.

To see wide spreads in action, open an exotic symbol like GBPZAR on a one-minute M1 chart on a demo account.  Open a position and quickly close it.  You will see exactly where the market got you into the trade and where it let you out.  Not a pretty sight, is it?

Now try the same, on a demo account, with EURUSD.  You will then see what we mean by tight spreads.