Forex buy and sell meaning
As a result profit will equal to maximal spread value. This trading strategy under variable spread conditions has an advantages of low risks involved, because profit probability does not depends in this case on actual currency pair quotation but only on spread value. More over if the trading position is open during minimal spread it guarantees breakeven result and makes profit earning highly possible. There are several factors that influence the size of the bid-offer spread.
The most important is currency liquidity. Popular currency pairs are traded with lowest spreads while rare pairs raise dozen pips spread. Next factor is amount of a deal. Middle size spot deals are executed on quotations with standard tight spreads; extreme deals — both too small and too big — are quoted with broader spreads due to risks involved. On volatile market bid-offer spreads are wider than during quiet market conditions.
Status of a customer also impact spread as large scale traders or premium clients enjoy personal discounts. Nowadays Forex market characterizes high competition and as brokers are trying to stay closer to customers, spreads tends to be fixed on lowest possible level.
Each trader should pay sufficient attention to spread management. Maximum performance can only be achieved when maximum quantity of market conditions is taken into account. Successful trading strategy is based on effective evaluation of market indicators and specific financial conditions of a deal. Because spreads are subject to change, spread management strategy should also be flexible enough to adjust to market movement.
As a newcomer to the Forex market, there are several terms used that you may require a definition for. Both these terms are also a very important attribute of the Forex market as both represent the value of a currency pair to the trader and the broker. In the Forex market, the value of a currency is presented in pips. For example, if you are going to purchase U. If you want to get Japanese yens by selling U. Graphic representations of rates differ depending on the trading platform provided by the Internet brokers.
As big figures rarely change, they are often not displayed in a sell rate ask of official quotes on Forex. For example, the mentioned above U. The difference between bid and ask prices right and left sides of quote is called spread. Spread is the basis of receiving profit for the party setting the quote.
You sell USD and receive x If someone comes there now and buys these USD , the sum of x From this example it becomes clear that the exchange office earns on the opposite currency transactions, i.
This principle is the basis of the broker profit receiving on Forex. We will learn to calculate the profit of the executed deal in the currency needed in other chapters. Now it is important to realize, that there are two rates in every Forex quote buy rate and sell rate and the difference between these rates is called spread and is calculated in pips.
So, spread is a source of profit for the party offering the quote. That is why retail brokers, that are providing private investors with an access to on-line Forex trade, do not take commissions as a rule, they get benefit from spreads instead.
In the following chapters where the process of opening and closing Forex positions will be discussed, we will describe in details why high spread is not favourable for a private investor. Now it is necessary to understand that choosing a broker first of all you should pay attention to the size of spread: Who sets buy and sell rates? Where are they taken from? Currency quotes are made up only by supply and demand on the currency market. The main influence on exchange rates is exerted by major active participants of Forex market earlier we have discussed the classification of Forex market participants.
Following the main change of the rate, large passive participants and millions of small traders also influence the further change of rates. Thus, if the majority of market participants try to sell the particular currency, its price falls.
If the main tendency is to buy this currency, its price grows. So, the trader's aim is to detect this tendency in time. For currency market participants the spread size is not always identical. For the main Forex market participants which open deals for millions of U. For smaller Forex players, who are dealing with less significant sums of money, the spread size is bigger.