The spread in the former is the difference between what the market maker is willing to accept and the amount he or she will actually pay for it. The spread is often very minimal, but that’s fine for the market maker because he or she is guaranteed to earn a profit.

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Chapter 4:
HOW DO SPREADS
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HOW DO SPREADS WORK WITH FOREX?
Everything you need to know about the growing trade mechanism known as Forex.
In Forex trading, like sports gambling, you need to know You need to understand the spread before making a trade
what the spread is if you want to end up making any because it’s the one fixed cost, and the lower it is the
money. The spread in the former is the difference better off you are as a trader.
between what the market maker is willing to accept and Just like when you’re exchanging money abroad, every
the amount he or she will actually pay for it. The spread is currency transaction comes at a cost. Otherwise, no one
often very minimal, but that’s fine for the market maker would offer that service, so it all makes sense. The same is
because he or she is guaranteed to earn a profit. Plus, a true with Forex trading. That means that you need to
low spread makes trading more appealing, and the more shop around to find the lowest spreads at reliable,
trades the market maker accepts the more he or she regulated market makers in order to earn the most profit
earns. The actual spread varies based on a per trade.
number of factors, some of which include the demand
for a specific currency, the supply of the currency, its
liquidity, and its competitiveness.
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Because the Forex market is so huge (over $4 trillion in If an investor purchases $5,000-worth of British
daily circulation), that means it’s a competitive market. pounds but immediately realizes it wasn’t a smart
In any competitive market the buyer has a better chance thing to do, he’ll have to pay two separate
of getting a good price, and that’s what we have here. transactions fees. If we assume that he is using a
Take the time to look around and you’ll find very low broker to make the trade, and the broker charges $20
spreads. per transaction, the trader has immediately lost $40
and then some based on a the bid/ask spread, which
To better understand what we’re talking about here, let’s in this case we’ll say is $1.80 to $1.90. That means he
take a firm example: originally bought about GBP 2,600, and then when he
switched back to U.S. dollars he received about $4,717
back, minus another $20 broker fee. That means that
the spread alone earned the market maker over $260.
The lesson: know your spreads!
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