What Are Spreads on Audacity Capital?

Introduction

If you are planning to maximize your trading profits, you have to understand the concept of spreads in Forex trading. Forex spreads directly impact the cost of trading. It determines how much profit and loss you will make from your trade.

Tighter spreads mean low transaction costs, meaning that traders get to make profits from small market movements. A wider spread, on the other hand, means high transaction costs, which equates to less profits.

Proprietary trading firms have become a better alternative for most traders who wish to increase their profits. This is because they offer low spreads, allowing traders to make substantial profits from their initial investment. Keep reading this article to learn how to use spreads for profitability and how they are calculated.

What Are Spreads in Forex Trading?

Spread in Forex trading is the difference between the bid price and the ask price of any particular currency pair. The bid price is the best available price a buyer is willing to pay for a currency pair, and the ask price is the best available price a seller is willing to sell the currency pair. This difference is what is referred to as the spread or bid/ask spread.

Spread is basically the cost of trading that particular currency pair, and it is also how brokers make their money. Instead of brokers charging you a separate fee for opening a position, the amount is made from the buy and sell of the assets you trade. 

When you buy a currency pair, the broker sells it to you for more than he paid. Conversely, when you sell a currency pair, the broker buys it for less than what they will sell it for. This is what is known as the bid/ask price, and it explains why wider spreads lead to high transaction costs and vice versa.

For example, if the GBP/USD spread is 2 pips, it means that you lose 2 pips for every trade you open and close. If you are trading with a standard lot size, you will lose $20 for every trade you open.

Calculation

The value of 1 pip for a standard lot size account is $10

GBP/USD Spread = 2 pips

2 x $10 =$20

$20 is the transaction cost for opening the trade.

How Is Forex Spread Calculated?

Changes in Forex spreads are usually measured in pips. Pips are small price movements and mostly take the fourth decimal place in most currency pairs .0001, or the second decimal place in JPY pairs .01. For example, if the GBP/USD pair has a bid price of 1.2500 and the ask price is 1.2502, the spread becomes 2 pips.

Spread = Bid price -Ask price.

1.2500 -1.2502 = 2 pips

In a JPY/USD pair, the spread is also calculated similarly, but you have to remember the pip position, which is the second decimal place. If the bid price for JPY/USD is 125.01 and the ask price is 125.05, the spread becomes 4.

125.05 -125.01 = 4 pips.

Understanding Forex spreads is essential for all Forex traders as it directly impacts profitability and trading costs. You always want to pick brokers or prop firms with low spreads, especially if you are a frequent trader or scalper. Otherwise, it’s going to be challenging to make reasonable returns from the market.

During low liquidity and high market volatility, spreads usually widen, increasing trading costs. But this rarely happens in prop trading firms because they have their own liquidity, which makes spreads very tight, allowing traders to enhance their profits in the financial market.

Types of Spreads in the Market

There are usually two types of spreads in Forex trading: Fixed spreads and variable spreads. Both have their characteristics, advantages, and drawbacks. Read on to find out!

Fixed Spreads

Fixed spreads are always constant regardless of what is happening in the financial markets. The bid/ask price does not change, which provides traders with stability and predictability.

Pros and Cons of Fixed Spreads

Kelebihan:

• Fixed spreads allow traders to know their trading costs, ensuring they efficiently execute and plan their strategies to remain profitable.
• Fixed spreads also protect traders from sudden market movements. High volatility can widen spreads, but trading with fixed spreads means that trading costs remain constant.
• It is also suitable for traders with little trading capital.

Keburukan:

• You are more likely to encounter a slippage. When the price is volatile, the broker may fail to adjust the spreads to suit the current market condition since it is fixed. This means that when you open a position, you will most likely enter with a price different from the intended one.

Variable Spreads

Variable spread means that the spread fluctuates constantly, just as the name suggests. When trading with variable spreads, the spread can widen and narrow at any time based on market conditions. Factors like liquidity, volatility, and supply and demand can affect prices, tightening and widening spreads.

Normal spreads are usually between 0.1 to 3 pips depending on the currency pair, but they can go up to 20 pips during high volatility periods. Let’s say, for instance, you want to open a long position on GBP/USD with a spread of 2 pips, but 5 or 10 minutes later, the FOMC report is released, or the United States President tweets something. This makes the spread of GBP/USD widen to up to 15 pips or even more.

Pros and Cons of Variable Spreads

Kelebihan:

• Variable spreads are usually narrow during low volatility times and high liquidity sessions. This reduces trading costs, allowing traders to make huge profits.
• Variable spreads respond to real-time market conditions, allowing traders to know the best times to trade.
• It reduces the likelihood of experiencing slippages and requotes.

Keburukan:

• Unpredictable costs. Spreads can significantly widen during low liquidity and high volatility times, leading to high transaction costs.
• It is unsuitable for traders with small capital, as it can quickly eat away their profits.
• Variable spreads are also not ideal for news traders. During high-impact news, spreads may widen excessively, and what may appear profitable may turn into a losing trade within seconds.

Fixed Spread Vs. Variable Spread

Choosing the Right Spread

The concept of spreads can be challenging for most beginner Forex traders. Knowing which one is best for your style of trading will help you prevent significant losses, making your trading journey worth it:

• Beginner Forex Trader: Fixed spreads can be best for novice traders, as they can help with stability and predictability.
• Scalpers: Variable spreads could be your best pick. During stable market conditions, you could make more profits due to lower trading costs.
• News Traders: If you like to trade during major economic announcements, fixed spreads will help you avoid wide spreads, which will make you lose a lot of money.

Prop Firms and Spreads

By choosing the right spread type, you can manage your trading costs effectively, ensuring you remain profitable. Proprietary trading firms like Audacity Capital can help you with that. They will provide you with a set of rules, a risk management plan, and support materials to help you pick the best pairs with tight spreads that will ensure you maximize your returns.

You will get access to capital, which will allow you to open large positions. You will also enjoy competitive spreads and low transaction costs. Prop trading firms partner with liquidity providers, allowing their traders to trade with tighter spreads, which helps boost their returns significantly.

Apart from tighter spreads, Audacity Capital also offers fair profit sharing. You can get up to 85% profit share depending on your account size and the profit you generate each month. To get your funded account today.

Conclusion

Forex spread is a crucial concept in trading that all traders must understand. It represents the cost of executing a trade. By understanding it, you will be able to maximize your profits and cut your losses. It does not matter whether you are using fixed spreads or variable spreads. Knowing how they work and how they impact profit and losses will help you come up with a better risk management plan.

Audacity Capital is here to offer you unique advantages, including tighter spreads, professional support, huge starting capital, and a conducive trading environment, ensuring you become a successful Forex trader. You can get started now with our Ability Challenge or a Funded account.

FAQs

Is It Really Necessary to Know Forex Spreads?

Yes, understanding Forex spreads will help you prevent losses and develop strategies to boost your returns. Wider spreads lead to high transaction costs, and tighter spreads mean low transaction costs. Forex spreads will also help you pick the right brokers and prop firms.

What Affects Forex Spreads?

Market conditions like market volatility and liquidity may affect the bid/ask price. Volatile markets and low liquidity may widen spreads.