What Is Spread In Forex Market

 

WHAT IS SPREADS IN FOREX MARKET

When a person choose to initiate doing trade in foreign exchange market, usually there must be some questions around spreads and how some accounts have spreads and how some accounts have lo spreads.

In this article, we will try to cover what spread is?, to get a better understanding of this concept  of Forex.

WHAT IS SPREAD

We can define spread as the friends between the bid(sell) and ask(buy) price of a currency pair. Spread can be measured in pips( point in percentage) which is the smallest unit of price movement of a currency pair.

The purchase price will always be higher than the ceiling price, which means that in, financial market time and price matter the most.

KEY TAKEAWAYS:

1)   Spreads are based on the buy and sell price of a currency pair.

2) costs of the currencies are based on spreads and sizes of lot.

3) spreads in forex keep fluctuating and should be referenced from your trading platform.

UNDERSTANDING SPREADS IN FOREX MARKET

 Now let us understand the type of spreads in Forex along with an example for better learning. So before calculating the cost of a spread but that the spread is just the ask price - the bid price of a currency pair.

There are always 2 prices given in a currency pair, the Bid and the ask. Bid price is the price at which you can sell the base currency and ask price is the price you would use to buy the base currency.

When there is a  wider spread, it means there is a greater difference between the prices so there is usually low liquidity and higher volatility.

And lower spread indicates low volatility and high liquidity. Thus, there will be spread incurred when trading a currency pair with a tighter spread.

There are two basic terms related to the spread that are:

a) Liquidity:

                 It refers to how active a market is. It is determined by how many traders are actively trading and the total volume they are trading.

b) volatility:

                   it is the measure of how extremely a market's prices change. Markets liquidity has a big impact on how volatile the market's prices are.

On this note we can understand the types of spreads. So there are two types of spreads that are:

1) Fixed spread:

                  A fixed spread is when the broker guarantees that no matter what happens in the market, the spread will remain the same. As if the spread on  EUR/USD was 1 pip, I will stay the same no matter what.

2) Floating spread:

                           It is based on the market demand. Similar to the price change rates of currencies, the spread can change by growing and lowering. The market then adjust it based on how many people continue to trade that currency pair.

EXAMPLE:

1. Let us understand the concept of spread by taking example; suppose a trader buy GBP in lieu of EUR, so in this case ,EUR would be our base currency and GBP will be counter currency.

          EUR        GBP

      1.1037   /    1.1039 

Now after subtracting= 1.1039-1.1037= 2.

On this note we can say that the spread is of 2 pips.

2. Let us take another example, if the quote of the GBP / USD currency pair is, bid= 1.2920 and ask= 1.2923, then spread= 1.2923-1.2920= 0.0003 USD.

        Or simply 3 pips.

Here is a simple formula we can estimate spread costs. That is:

     Spread cost= spread size* lot size* number of lots.

          Let's estimate the spread cost from the example above. The size of the lot is $100000 .

         {  0.0003 * $ 100000 * 5 = $150 }

SPECIAL CONSIDERATION OF SPREAD IN FOREX MARKET :

                 while doing trade in Forex exchange, we also need to consider when to trade the USD /JPY , the USD/JPY has a lot of volatility. One of the most liquid times to trade forex in generally is between 8:00 a.m and 11:00 a.m eastern time, when london and newyork session overlap. The USD /JPY  also is highly liquid in the Tokyo session.

CONCLUSION:

                    basically the spread is most important cost in Forex trading. A new table broker that charges reasonable spreads and offers responsible leverage is the best option for and trader to have experience.

WHAT IS SHORT IN FOREX MARKET AND HOW TO GO SHORT IN FOREX MARKET

WHAT IS SHORT IN FOREX MARKET

SHORT IN FOREX : A CLOSE LOOK

As we can see that being a trader in any market, a person should be aware of going long as well as going short.

Therefore,

           In this article, we are going to learn about what does going short means in the market of foreign exchange.

Basically,

                A trader sell short, when he believes the value of any currency pair that he is trading will fall. This is basically what we call going short.

UNDERSTANDING:GOING SHORT IN FOREX MARKET

In each and every financial market, including Forex, you sell short When You Believe the value of the currency pair you are trading will fall.

Apparently,

                  Going short in the forex market follows the same general principle ----- you are betting that a currency will fall in the value and if it does, you make money----- it's a bit more complicated.

HOW TO GO SHORT IN FOREX MARKET :

    Going short, in other words the short position, is essentially the opposite of going long. When traders enter short position they expect the price of the underlying currency to depreciate (go down) .

Short a currency means to sell the underlying currency in the hope that its price will go down in future allowing the traders to buy the same currency back at a later date but at a lower price.

Hence,

      The difference between the higher selling price and the lower selling price is known as profit.

Therefore,

        Traders look for sell- signals to enter short positions. A common sell signal is when the price of the underlying currency reaches for level of resistance.

Basically,

            Level of resistance is a price level that the underlying has struggled to break above.

FOR EXAMPLE :

                      Let's say GBP / USD rate is 1.3452 , which means one pound is valued at  $ 1.3452 . If you expect the value of the pound to fall against the dollar you will sell the currency pair at the rate.

If you bought the pair after the rate went to 1.3441, you would have made 11 pips.

 { PIPS : Percentage in point, a smallest change in the quoted currency pair.}

 Hence,

            The Math to find the value of a pip in the quote currency for standard lot of a base currency is 0.0001 (1 pip) / 1.3452 (exchange rate of pair) × 100000 ( lot size) = $ 7.43 . That means for you 11 pip gain, you would have made 11× $ 7.43 = $ 81.73 , excluding the commission.

SPECIAL CONSIDERATION :

               Broker may charge a set Commission perhaps--- $ 5 , for each currency trade of a standard lot they carry out or they may keep the difference between the bid price and the asking price for each trade.

WINDING UP :

                   If you are thinking about shorting a currency pair, you must keep risk in mind --- in particulars the difference in risk between " going long" and " going short" .

Therefore,

         If you are shorting a currency on the other hand, you are betting that it will fall when, in fact the value could rise and keep rising.

Theoretically,

              There is no limit to how for the value could rise and consequently there is no limit to how much money you could lose.

WHAT IS LONG ON FOREX AND HOW TO GO LONG IN FOREX MARKET

WHAT IS LONG IN THE FOREX

When it comes to the foreign exchange market, one should be familiar with the term "going long" in the forex  or in other words, one can say" taking a long position".

      

      Basically,

                    when being using in trade, long refers to position that makes a profit if a currency pair's market price increases.

UNDERSTANDING: GOING LONG IN FOREX

When a trader trade in foreign exchange market, since they buy or sell in the currency pairs, "going long" means that you are buying the base currency and selling the quote currency .

 Therefore,

             Taking example, if you go long EUR/USD , you are buying Euros and selling US dollars.

Apparently,

Going long is the opposition of going short or shorting, which means taking a position that makes a profit if a currency pair's market price Falls. Derivatives allow traders to take a long position on a market without actually buying the underlying currency pair.

SPECIAL CONSIDERATION: GOING LONG IN FOREX

To trade foreign currency, you buy or sell a currency pair. All currency pairs have a base currency and a quote currency. The pair usually looks something like, USD/JPY =100.00.  Here, the USD or, US dollar, is the base currency and JPY or Japanese yen, is the quote currency. This quote shows a rate of $1 being equal to the ¥100 .

 Consequently,

                       Because every currency trade involves a pair, you will always simultaneously go long on one currency shot on the other when making a trade.

Therefore,

         When you are long a currency it means you are betting the base currency will strengthen against the quote currency. In the example above you are betting the dollar will be equal to more than 100 yen in the future.

Hence,

            In a long trade on this currency pair, you are buying  or  going long on the dollar and you will simultaneously go short on the Japanese yen. In effect, you are selling the Yen , just like when you short a stock by selling the shares in stock market.

HOW TO GO LONG IN FOREX TRADING ?

        Because you are both buying and selling currencies when you make a Forex trade, you can speculate on the upward and downward movement.

 Therefore,

           To go long on a certain currency, you open a trade in a buy  position because you believe the base currency is bullish ----  likely to raise in value. At the same time it also means you are bearish on the new of the quote currency and it will fall in the future.

Accordingly ,

                    if you are correct the value of the base currency Rises close out your trade then at the current market price and take a profit.

 WINDING UP:

        Trend-following traders who watch trend acceleration often go long on a trend position and hope to stay in that trade until the trend expires. Another reason traders may decide to go long a currency is when a central bank announces its plans for monetary tightening, which historically tends to lift its currency's value.

 

 WHAT IS HEDGING IN FOREX MARKET

 WHAT IS HEDGING ?

                     

                As we know that, not only in foreign exchange but hedging is a term we can hear in each and every financial market.

Hence,

          Each and every trader should be familiar with this term. In basic words, hedging in Forex is a strategy to protect one's position in a currency pair from an adverse move. One is to place a hedge by taking the position in the same currency pair and the second approaches to buy Forex options.

IMPORTANT POINTS IN HEDGING

a) Process of protecting a position in a currency pair on the risk of losses is called hedging.

b) Hedging is done by two main strategies in Forex.

c) First strategy is to take position opposite in the same currency pair.

d) The second strategy involves using options.

e) In foreign exchange, hedging is a type of short term protection.

      

SPECIAL CONSIDERATION IN HEDGING

  

A trader tries to coming up with a way to protect against a big loss in foreign exchange. Two main strategies by which one can protect themselves from losses that is:

1) PERFECT HEDGE STRATEGIES

                        A Forex trader can create a "hedge" to fully protect an existing position from an undesirable move in the currency pair by holding both, a short and a long position simultaneously on the same currency pair.

Hence,

It is called  'Perfect hedge' as it eliminates all the risks.

2) IMPERFECT HEDGE STRATEGY

                        The forex trader can create " hedge" to partially protect an existing position from an undesirable move in the currency pair using Forex options.

Therefore,

               This strategy is referred to as an 'imperfect Hedge' , because the resulting position usually eliminates only some of the risk associated with the trade.

      

UNDERSTANDING HEGING WITH EXAMPLE

Suppose, a trader short GBP / USD at 1.4225 thinking the pair is going to move lower but is also concerned the currency pair may move higher if the upcoming parliamentary vote turns out to be bullish.

 Therefore,

                Trader can hedge a portion of risk by buying a call option contact with a strike price somewhere above the current exchange rate like 1.4275, and an expiration date sometimes after the scheduled vote.

Hence,

If even after vote, the GBP / USD doesn't move higher the trader can hold onto the short GBP / USD trade, making profit the lower it goes.

Or,

If even after vote the GBP / USD starts moving higher, the trader does not need to worry about the bullish move because, thanks to the call option.

Therefore,

              The risk is limited to the distance between the value of pair when options were  bought and the strike price of the option, or  50 pips in this instance ( 1.4275 - 1.4225 = 0.0050 ), plus the premium paid for the options contract.

    

WINDING UP "HEDGING"

Hedging means coming up with a way to protect yourself against a big loss. When you buy a car insurance you are protecting,  or hedging against the chance of having an expensive accident.

 Apparently,

                   In Forex, think of a hedge as getting insurance on your trade. Hedging is a way to reduce or cover the amount of loss you would incur if something unexpected happens.

What Is Pips In Forex Tradig

WHAT IS PIPS IN FOREX MARKET

As we know, that PIP is a very important and basic word used in the market of foreign exchange. Basically it is referred to percentage in point or it can also be called as price interest point. The smallest move that an exchange rate can make in price based on forex market conventions is known as pip.

A pip is an incremental price movement it has a specific price That depends on the market traditionally Forex prices are quoted by the fixed number of decimals places with the highest taken 4th decimal and originally a PIP is a point movement quoted in the last decimal place.

WHAT IS PIPS

(a) PIP is the smallest change in the quoted currency price is usually one basis point that is 100th of 1%.

(b) Forex currency pairs can be measured in terms of pips acronym for percentage in points.

(c)Pairs which are based on currency can be typically quoted where the buy- sell spread is measured pips.

UNDERSTANDING PIPS IN FOREX MARKET

Multiplying the size of your position by a pip will give you the answer to how valuable a pip is ??

Suppose to trade EUR  / USD currency pairs and you decided to buy a lot. A lot costs 1 million euro. For you are / USD single PIP is 0.001. Hence the currency value of pip for one lot would be 100000 *0.0001=$10.

Now suppose that you buy you are / USD for 1.1 6650 and after that 1.66 60 close your position by selling a return. The difference between the two is:

       

          1.16660 - 1.16650 = 0.00010.

In other words the difference is 1 PIP.. You have made $10 benefit. So if we work through this sample numbers from a different angle then we can further tell what is a PIP in Forex trading is.

ADVANTAGES OF PIPS

In the old times the change in  Forex prices was quoted by a fix number of decimal places with the maximum taken up to 4th decimal places. Many brokers quote foreign currency prices to an additional decimal place although this means that one often does not have the last decimal places within quotes it remains a standard eyes value above all brokers and platforms. The main advantage of PIP is any buyer or seller can get profit just from a point also.

SPECIAL CONSIDERATION OF PIPS IN FOREX

Now we would take a look on how does PIP work. Basically, pips effectively the smallest increment in which a Forex value moves, with the advent more accurate methods of pricing this is no longer the original definition. For the most currency pairs there is a Movement in the pips decimal place but it does not applicable in all pairs does the notable is JPY.

For Japanese Yen pips is came of second place of decimal.

6) EXAMPLE -

- Now the concept of pips better ,we would take an example.

S suppose you sell to lots of USD / JPY why in 113.607. USD / JPY why pair is worth 100000 USD that is why you are selling two lots as 2 * 100000 *113.607=22,721, 400 JPY to buy 100000 USD =$200000.

So you are selling 200000 USD.

 -will assume the price moves against you and you decide to cut your losses. You will close your position on 114.107 for USD / JPY, a PIP is the movement in the second decimal place. The price has increased against you from 0.50 which is 50 pips.

- now you close your position after buying two lots of USD / JPY for 114.107. At this rate cost, to buy $200000 USD again you have to pay 22, 821, 400 JPY as:

       

             {2* 100000*114.107}=22,821,400.

- now this is more than 100000 JPY from the original sale of USD so you are short of 100000 JPY. For 50 pips movement losing 1 lakh Japanese yen that for each pip by you would be:

           100000 / 50 =2000 JPY.

Because you sold 2 lots, this is 1000 pips price per lot.

If your account is displayed in a currency that is different from the bid currency it will affect the pip price.

7) CONCLUSION-

So finally, coming on conclusion, we would know that pips ( percentage in points) plays a very important and valuable role in the forex market. Millions of buyers and sellers depend upon the profit or loss just because of pips.

There are hundreds of traders trading in Forex having different currencies multiple money measurement

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