Forex spreads in Hong Kong can be confusing for those who are unfamiliar with the process. Just as local transactions, there is a price that you pay and a price that the merchant accepts.
Forex is a decentralized market. In other words, the forex market has no central physical location. This, in turn, means that trading needs to be done electronically and through intermediaries. Much of this happens through bank brokers in a process known as “interbank dealing,” although some retail brokers also deal directly with their clients in practice called “retail forex.”
In most cases, when you place an order on your broker’s platform, there will be two prices displayed for each currency pair which you can trade – one being the buying price (also known as “ask” price), the other being the selling price (the “bid” price). In addition to these two prices, there will usually also be a spread between them. In the case of retail forex, spreads may be fixed between a certain percentage, or they may vary depending on the liquidity of the instrument being traded.
Forex spreads can therefore play a vital role in forex trading. As a beginner, you must understand what a spread is and how it affects your trades. This article will explain precisely what spreads are (and aren’t), discuss typical forex spreads both for retail traders and banks, as well as provide advice on using this knowledge to your advantage when trading currencies.
Below we’ll take you through some key definitions and show why understanding these terms is crucial for successful forex trading.
What Is Forex Spread? (And What Isn’t)
A “spread” is the difference between the buying price and the selling price of a security or instrument. It’s important to note that in the case of retail forex, spreads are not fixed but depend on market conditions. The spread can be expressed either as a percentage if comparing one currency with another or pips when comparing two different pairs of currencies.
“Pip value” is exactly what it sounds like – if you have an account with 100:1 leverage, then each pip will be worth $0.10 in your trading account. For example, if your EUR/USD trade were worth 1 point (or “pip”), this would imply that for every 1% movement in the exchange rate, your profit or loss would move by $100 in either direction.
The difference between the buying price and selling price of a security or instrument. Not all forex spreads are fixed or variable, but most retail brokers will typically offer both fixed spreads and variable spreads for their clients to choose from.
A percentage spread is expressed as a certain number of pips above or below the current market rate. This value is then multiplied by the size of your trade order to obtain an indicative cost per unit traded. Similarly, a fixed spread can be viewed as “costing” more when markets are less liquid. When there is low turnover in the market, this will result in slippage whereby large orders can push prices against you, leading to increased costs on top of disproportionate transaction fees levied on your account.
What Are Typical Forex Spreads?
Forex spreads are not the same for every broker, so it is essential to research before opening an account with a new provider. There are several broad categories of forex brokers, including those catering specifically to retail traders and those who offer services directly to institutional investors and banks. When dealing with smaller providers, there is a chance you will be subject to even wider spreads than those outlined below. However, you can easily avoid these by using a low-cost brokerage service such as Saxo Bank.
Typical Forex Spreads for Retail Brokers
Recent research by FXPro has revealed that the average spread on a USD/EUR currency pair is around 2.5 pips. This is not surprising, given that retail forex trading accounts for about 80% of daily forex volumes worldwide. The table below compares this to the spreads charged by different retail brokers.
Note that core spreads are averages taken across many brokers and could potentially differ slightly from broker to broker – each provider will offer you their unique value based on your chosen account type. On top of this, some providers will also charge commission fees above and beyond these figures. At the same time, specific platforms may come bundled with additional extras such as free VPS hosting or e-books to encourage signups.
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