Lesson 6: What is a spread in forex?

– [Nate] Two.

– Welcome back everyone.

I'm Rob Booker, best selling author of Adventures of a Currency Trader.

I bet you're tired of hearing me say that.

I think I'll stop doing that.

We talked about pip value, we talked about account sizes, we talked about a bunch of stuff.

We are going to talk aboutwhat those trade sizes mean and how much money each pip is worth.

Before we do that, I wanna talk about FX Spreads and Commissions.

This is the way the broker makes money, is by charging a spread and in some cases, charging a commission on each trade.

Now when you pull up your trading account, and you pull up the quote window, and you're about to take a trade; on the right side is the buy price and on the left side is the sell price.

I'm gonna look at it on the slides so you could see it even better.

So, if you're looking at a quote for the US Dollar/Japanese Yen; it might look something like what we're seeing on the chart right here.

106.

90, 106.

92.

Now the price at which you can buy it is over here on the right, they might call that the ask.

I just call it the buy price, 'cause if you hit that price that's the price that you can buy it at.

Now if you buy it at 106.

92, you can immediately sell it at 106.

90.

Now if you buy it Nate at 106.

92, and immediately sell it for 106.

90, have you made money or lost money? – [Nate] Lost money.

– You've lost money.

That's because thebroker charges a spread.

You're gonna start yourtrade off at a loss.

The broker got the Dollar/Japanese Yen in their inventory for 106.

90, and they're letting you buyit from them at a markup of 2.

You may actually hear the term markup.

In the world of FX dealers, that's a word for spread; markup.

If you sell a used car to a used car dealer and then they sell it to someone else, they buy it from you, they mark up the price and then they sell it, that's the markup.

The spread is the markup.

It's the way that thedealer makes their money.

Okay, so when you're reading a quote, you can hit the buy price at 106.

92, thinking the US Dollar/JapaneseYen is going up.

And then you can wait til thesetwo prices start to climb, and then you can get out of the trade at hopefully what is a highernumber later on than 106.

90.

That's the spread, you alwayshave to pay the spread.

That's the cost of doingbusiness in currency trading.

Now, there are times when a broker.

.

.

I'm gonna use C as the terminology.

May give you a tighter or lower spread so it's easier to getyour trade into profit.

They may in fact giveyou a spread of 106.

90, and 106.

91 that makes it easier to get your trade intoprofit much more quickly.

The market doesn't have to move as far.

They may do that bycharging you a commission; a small commission on each trade equal to a fraction of your trade size.

It's usually very reasonable.

It's not a problem thata broker or a dealer offers you an account with a commission, that can give you a tighter spread, better execution, andit's not a bad thing.

But that's how they make their money.

They make their moneyby charging you a spread and in some cases, a commission.

So, the spread on the Euro/US Dollar might look something like this, 1.

2900 and if you hit this price, you can sell it or bet that it's goingto go down at that price.

The spread on a Euro mightbe three pips higher, so if you sell it at 2900, you are immediately going to be.

.

.

In this case Nate, how many pips down willyou be immediately? – [Nate] Three? – You'll be down immediately three.

So, it's not uncommon for you to see a small loss in your accountwhen you first take that trade.

And that's fine, in orderfor you a sell trade.

.

.

If you initiate a selltrade, you're just betting that this Euro/Dollar's gonna go down.

That's all you're doing.

And if it falls, both ofthese numbers are gonna drop, and this is the price you canhit to get out of your trade.

You gotta buy it back.

If you sold it to start, you gotta buy it back.

If you bought it to start, you gotta sell it to get rid of it.

And that's just how this works, you're betting that something'sgotta go down on this side, and you're betting that'ssomething's gotta go up on this side.

There's always gonna be a difference between those two pricesand that's the spread and that's how your dealer makes money.

Now, people talk about tight spreads as a reason to trade with a dealer.

Generally speaking, most of the spreads are going to be very similar, across all the FX dealers around the entire world, right now.

Here's a little nugget of wisdom that most people won't talk about.

There's so much moneyinside of the spread.

There might be two pips, there might be three pips, there might even be just 1.

5 pips, the spread's gonna be that wide.

These brokers will in somecases, pay out rebates.

Sometimes I'll talk to Nate here, 'cause he's sitting with me.

Hey Nate.

– [Nate] Hello.

– And a rebate is alittle bit of the spread returned back to the customer in exchange for opening up the trading account or returned back to someonewho referred the customer.

It's a little kick back.

So, there's money built into the spread for the dealer to compensate it's partners or even send money back to youand those are called rebates.

So, you can actually getsome of these spread back on a monthly basis evenfrom your FX dealer or from an introducing broker as part of the wholeinterworkings of all this.

Nate, did any questions come to mind? This is often a complicated topic.

Did you think of any questionsas we were discussing this? – [Nate] No.

I wanna saywhat is a pip worth but.

.

.

? – All right, so what's a pip worth? Well, that's our next lesson.

So, well wrap things up here and as we do I wanna say thank you toour sponsor Forest Park FX.

Interested in FX training? Contact Forest Park FX.

To open an account andreceive cash back rebates on every trade you place, go to forestparkfx.

com.

Forex trading carries asignificant risk of loss and it's not suitable for all investors, terms and conditions will apply.

I'm Rob Booker, thanksso much for being here I'll see you on the next one.

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