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    What is a Forex Spread in Trading (Part 4)

    Abstract:Spread is one of the basic terms of forex trading and investing.

      Previous part : https://cutt.ly/ejE8vJI

    How

      How to trade with the spread ?

      

      Anyone who wish to become a CFD trader must choose their investor profile : Do you want to speculate by scalping, or do you prefer longer-term investment in the stock markets ? Do you prefer technical or fundamental analysis ? Whatever your profile, the spread plays a fundamental role in your trading strategy.

      For scalpers and traders with a speculative profile, the spread plays a very important role, as they are required to enter the markets many times a day. If the spread is too high, their transaction costs will be high and their gains in the markets will be limited.

      For traders who prefer to invest for the longer term, or to trade economic announcements, the spread is also important, because in the event of high volatility in the markets, they could see their stop orders being affected and invalidated from fundamentally valid trading scenarios, because of “false prices” which are solely due to market noise and a temporary influx of liquidity.

      

      Spread on MetaTrader

      

      The image below shows an order screen for the GBP/USD pair in MetaTrader 4:

    image.png

      The dimension shown in the image is 1.31190/1.31208. It can be seen that the digits for the last decimal place are smaller than the other numbers. This shows that they are ticks and not pips. The Forex pip difference between supply and demand is 1.8 pips. If you bought and sold instantly at this point, the value of the spread would have been 1.8 pip.

      You can determine the spread value in euros by calculating the pip value based on your position size and then multiplying those two values. Either: Value of the Spread = Spread in pips * Pip value * Position size. Here, if you intended to open a position of 1.4 lots, the value of the spread would have been:

      - 1.8 (Spread in pips) x US $10 (Pip value for 1 GBP/USD lot) x 1.4 (Position size in lot) = US $25.20

      The spread (the cost of the transaction) would have been 25.20 USD for a position valued at 140,000 GBP.

      If you look at the screenshot below, you can see that we have selected “Modify Order” in the “Type” category :

    image.png

      Note that the “Modify Order” part in the window has drop-down menus that allow you to quickly select the levels that are a certain number of points away. So there is an important distinction to be made between points and pips. The points in these dropdowns refer to the fifth decimal place, in other words, they are ticks that correspond to a tenth of a pip or 0.1 pip. If you select 50 points here, you will choose an order level of only 5 pips.

      A very good way to familiarize yourself with Forex pips is to test the MT4 platform using a demo trading account, which allows you to view and trade on real market prices, but with zero risk, because in a demo account your invested capital is virtual.

      (To be continued ... )

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