The Brokers Spread- When it Comes Out of Your Account
The Brokers Spread- When It Comes Out Of Your Account.
One of the first things you notice when looking for a Broker is the 'no commission' advertising.
However there is a cost, the broker will make money from your trade by simply charging you the difference between the buy (ask) and sell (bid) price. This is called a spread rather than commission, but it means the same, a cost to you the trader.
The problem at the time of writing is the Brokers have increased their spread (costs) over the last few months. For example GBP:CHF has a 10 pip spread and EUR:GBP has a 7 pip spread which makes it very difficult to use very short time frames for trading.
The first thing is to realize that when you look at the charts they are displayed using the 'bid' price.
Let me show you an example.
Regardless of the currency lets say the current market price shown on the charts is 1.2010. This means if you want to sell short that is the price that you would be executed at. But if we turn it around and you want to go long (buy) you would be entered at 1.2010 plus the spread, which in the case of a 10 pip spread would be 1.2020.
If you are trading with the intention of going for large pips this is not so significant and traders in that position are not going to worry about it , however if you ( or your system is using the scalping method) it becomes more important.
To give another example if the current price is 1.2010 and you put your entry order to go long at say 1.2030 many brokers will enter your trade at the time when the chart hits 1.2020 (remember the chart price is the bid/the sell price), this is because the buy price is the sell price plus the spread.
The problem is your system might be waiting for the sell price (chart price) to get to a higher price before you buy. The way to get around this is to add the spread on to your entry order to buy. In this case you would place your entry order for 1.2040 and they would enter you at 1.2030 bid price which is what you originally wanted.
You can still place your stop at your original figure because that is a sell, and the charts are showing sell prices.
Understanding how this works is vital if you are scalping.
About the Author:
Lyndsay is a successful entrepreneur and forex trader. Discover how you can get Forex Ambush and start trading successfully today. For the #1 forex system available check out http://forexambush-live.com/