One of the key concepts in Forex is the spread, which is based on the difference between the buying and selling price of currency pairs.
It is formed by the supply and demand for currency pairs.
Brokers receive quotes from various liquidity providers – banks and other financial institutions, and provide them to their clients with the addition of their own spread.
As a result, the final spread may still include an additional broker’s markup.
Spreads may vary depending on the time of day.
During major trading sessions, market liquidity is higher, which helps to narrow spreads.
During periods of low liquidity, such as overnight or weekends, they may widen.
Important economic data, such as employment reports or interest rate decisions, as well as political events can cause significant market fluctuations, which often result in spreads widening.
This is because brokers seek to protect themselves from increased risk in times of uncertainty.
The spread is part of the trading costs.
The smaller the spread, the less a market participant pays for each trade.
This is especially important for scalpers and those who make many trades throughout the day.
The width of the spread can influence the choice of trading strategy.
Strategies based on short timeframes require narrow spreads to ensure profitability.
For long-term strategies, they are less important because the value of the trade is spread over a longer period of time.