What is a spread in the financial markets?

Any trader or investor comes to the financial markets with the purpose of making money. He or she seeks to buy assets cheaper and sell them more expensive, capitalizing on the price difference between the associated commodities and expected market movements.

In any case, the trader analyzes the price and its fluctuations between sellers and buyers, which in financial markets is called a spread.

Let’s take a look at what a currency spread is and what other types of price ranges exist on exchanges.

What is a spread

In the financial context, the concept of “spread” (from the word “spread” – divergence) can differ depending on the type of asset. In general terms, a spread is the difference between two price values for the same or similar instruments.

For example, it can be the range between:

  • The prices of sellers and buyers in the market at a given moment.
  • Prices for one asset: currency, stocks, futures at the current moment and after a certain period of time.
  • Prices for the same type of commodity, but of different brands, etc.

The most common variant in trading and investing is the difference between the bid and ask price (Bid – Ask). This is a commission for each transaction, which makes up the broker’s profit.

This is how, for example, the currency spread is formed. The exchange glass helps to better understand this concept. It is a special table formed by a market maker, where all limit orders from sellers and buyers of an asset are reflected. Bids are placed depending on their proximity to the current quote: the closer supply and demand are to the current price, the smaller the currency spread is. Since orders on active pairs are quickly satisfied and removed from the stack, the spread is constantly changing.

The spread for CFDs on shares and other securities is formed in a similar way. It can be several dollars, cents or even a fraction of a cent, so it is usually denoted in points. For example, if the price of NASDAQ 100 index is 11760.5/11761.3, the spread will be 8 cents or 8 points. This value is displayed in the market overview and in the glass.

It is believed that the smaller the spread, i.e. the closer the price of buyers and sellers, the more liquid the asset. This means that a trader is highly likely to be able to buy or sell it at the right time at an adequate price.

Types of spreads

Depending on the type of exchange-traded or OTC asset, the concept of “spread” can vary.

Currency spread

If we talk about the spread as a difference between bid and ask prices, as in the case of currency pairs or CFDs, it can be divided into fixed and floating spreads.

A fixed spread does not change regardless of market conditions: even when important news is released, when supply and demand shifts sharply. This level is set and maintained by the broker. It is usually higher than the standard floating spread in a calm market and lower in times of increased volatility. Today fixed spreads are rare, they have been replaced by market spreads.

A floating or market spread depends on supply and demand in the exchange stack and changes according to the preferences of traders. Usually for volatile assets it is more favorable than the fixed one and can be equal to zero at times. However, at the moments of important news release such a spread logically widens, so many brokers warn their clients about it.

Market spreads

There are intermarket and intramarket price ranges.

Intermarket spread reflects the difference in the cost of the selected asset on different exchanges, which is typical for securities. An intra-market spread is the difference between highly correlated or related instruments, for example, between stocks and their ADRs.

A special type of intra-market spread is the calendar spread, which exists in the derivatives market. It shows the difference in the prices of contracts for the same asset with different expiry dates.

Futures spread

This type of spread represents a trading strategy. Unlike a currency spread, a futures spread is a method in which a trader simultaneously buys and sells contracts on identical or similar commodities to profit from the divergence of their prices.

A futures spread occurs when:

  • Buying and selling a contract for the same asset with delivery in different months.
  • Buying and selling futures on different assets with similar quotation dynamics (correlation).
  • Buying and selling contracts for the same commodity of different quality.

Factors affecting the spread size

The size of the currency spread and similar spreads is influenced by various factors relating to a particular financial instrument. The main ones are:

  • Liquidity of currencies and securities: The higher the liquidity, the lower the spread. A large number of traders and market participants interested in transactions with this instrument leads to an increase in buy and sell orders and increases the chances of quickly concluding a deal at the right price.
  • Volume of trades and transactions: On stock exchanges, large transactions lead to a widening of the spread as many limit orders are executed at the same price.
  • Transaction amount: If an asset is purchased for a very small or very large amount, there are additional brokerage fees that increase the commission.
  • News and Publications: The main drivers of markets. Buy or sell decisions are often made based on them. After news releases, demand or supply increases sharply, causing the spread to widen. Before important news, trading activity drops, liquidity decreases and the spread widens.

How to work with the spread

It is impossible to artificially influence the stock or currency spread, as it depends on market conditions. But in order to reduce costs, you can:

  • Do not trade at times of low liquidity and the release of important news.
  • Open accounts with floating spread and choose active trading hours.
  • Choose popular currency pairs and securities.

Spread is less important for long-term strategies, but in this case you should take into account another parameter – swap (if it is applied).

Opening positions with limit orders can significantly reduce risks and additional costs, especially for large transactions or work with unpopular assets.

The whole truth about earning on Forex: myths and reality

All newcomers, who encounter the currency market for the first time, reading warnings about high risks on the websites and banners of licensed brokers, ask themselves reasonable questions: is it really possible to make money on Forex, if such a large percentage of traders lose their deposits? Is it possible to double or triple the initial investment in a short time? How many months or even weeks could it take? Is it not a myth?

As in any other profession, not everyone will be able to earn a lot and successfully in Forex. Just like not everyone who decides to go into business will become the owner of Amazon or Apple. Success is a combination of talent, predisposition, luck and considerable labor. Gains are interspersed with losses, so it’s important to have patience, foresight and stress tolerance.

But the good news is that the answer to the question “can you make money in Forex” is positive. Everyone, regardless of education and abilities, with due diligence can achieve success. This process will be long, involving losses and disappointments, but it is not a myth. You will need a trading strategy, starting capital, access to a training platform and a reliable broker to get started.

Now let’s look at the myths about Forex trading that can scare newbies away or create false expectations. Let’s see where the truthful information about the foreign exchange market is and where it is not.

Myths about making money in Forex

There are many misconceptions about the workings of the currency market and the possibilities of making money on it. Some people think that after opening the terminal they will immediately find themselves on the beach with a cocktail, others think that trading is a fraud, similar to a casino. These extremes are self-deception. Let’s analyze the main myths about Forex and their mistakes.

Myth 1: “Forex is a quick way to get rich”.

This is probably the most common myth that has disappointed many traders. Forex liquidity does allow you to build up your deposit quickly, but the risks of loss are also high. There is no 100% working strategy – the same events can lead to opposite market reactions. It is important to understand how the Forex market works from the very beginning.

Currency quotes are formed in real time based on supply and demand, which depend on news and events. A trader analyzes the market, predicts the growth or fall of a currency pair and opens buy or sell transactions. No one can predict the further development of events with high probability, so experience and protective orders limiting losses and fixing profits are the basis of successful trading.

Myth 2: “There are no risks in Forex trading”.

Wherever money is involved, there is a risk of loss. Moreover, the higher the expected profits, the higher the risks of total loss of investment. Foreign exchange rates are constantly changing due to many factors, including economic news and political events. Fluctuations in exchange rates can be significant, and not always the result coincides with forecasts. Trading with leverage increases risks, as losses are covered by the client’s funds. Therefore, it is important to understand the risks and manage them competently.

Myth 3: “All you need is luck”.

This is the main misconception of lazy traders. Luck plays a role, but knowledge, tactics and discipline are more important. Success in Forex depends largely on understanding market trends, the work of economic indicators and factors affecting exchange rates. Training and constant updating of knowledge help traders make informed decisions and reduce the influence of luck on trading results.

Reality: How you can make money on Forex

The realities of the currency market are different from the myths. Let’s see what you should actually pay attention to and prepare for when opening your first trades.

Reality 1. “Training and practice are required”

Forex is a complex and dynamic market where training and practice are important. Initial training is necessary to understand the principles of the market and the use of the terminal. Practice on a demo account helps to practice skills and develop confidence in your actions.

Even experienced traders continue to learn, test new strategies and adapt to market changes. It is important for beginners to be ready for constant development and training, which increases the chances of successful earnings.

Reality 2. “Psychology plays a key role”

Psychology is important in trading. Only a “cool head” allows you to conduct trades according to the rules of the strategy, avoiding emotional decisions that can lead to losses. Successful trading requires controlling emotions, training discipline and patience, and analyzing your mistakes and successes.

Reality 3. “Work and patience lead to success.”

Forex trading requires diligence, patience and constant work. For most beginners, the initial stage is fraught with losses, but diligence helps you not to give up and develop skills. Creating and adapting a trading strategy takes time and constant work. Managing emotions and continuous self-development are key elements to long-term success.

Conclusion

Is it possible to make money in Forex? Absolutely. Everyone who is motivated, efficient, stress-resistant, disciplined and capable of learning can become a successful trader and make money on currency exchange rate differences. It is important to rely on the realities of the market, avoid myths and choose a reliable broker. Ready to start today? Open your first demo account and take your first steps towards professional trading!