Like other markets, forex trading in india offers the concept of Spread Trading. People find it difficult to understand the meaning of it. In simple terms, the spread is the difference of price when the trader buys and sells an underlying asset. In the equity trading, it is popularly known as Bid. The same concept is called Spread here.
For example, if the buying cost of EURUSD is 1.36440 and the selling price is 1.36426; then the difference is .00014. In the case of FOREX trading, the pip value is 1.4 pip because the digits after the 4th digit of the decimal are 14.
What does the spread indicate?
Since the spread is the cost charged to the trade when he enters and exits a stock position, it doesn’t get impacted by the profit or loss incurred in the trade. In the case of equity shares, the spread gets added to the underlying market bid (or offer price). In the case of FOREX trading, the spread is the difference between the product of bid-offer price and stack amount.
For example, if a trader decides to long GBP 10 on UK100 and the spread is fix spread of 10 points. When the market moves up 10 points, he closes the trade at the bid price. So the profit will be the difference between sale price and purchase price multiplied by the stack amount 10GBP.
If the market falls 10 points, then the loss will be purchase price-sales price multiplied by the stack amount 10GBP. Traders should practice it using forex trading practice account before they go online.
Why do experts vouch for fixed spread?
Some betting providers offer fixed spreads whereas some offer fixed ones. When you go for fixed spreads, the cost of the transaction is nothing but the spread cost. Hence, you are charged with the spread effectively when you enter and exit.
In the scenario of variable spread, on the other hand, spreads keeps on moving upward or downward based on the underlying market sentiments. It is quite obvious that when the uncertainty prevails in the market, spreads may go beyond control. Therefore, cost to exit increases with the widening of the spread. When we don’t purchase anything without knowing the full cost, then why should we enter into FOREX deal without knowing the cost of it? Free online trading training sessions should be availed to know the trading concepts well.