The promise of "free" money with a great scalping strategy can make every trader's head spin. But as you know, no scalping strategy can be successful without understanding the size of the Forex spread and how to exploit the advantages of low spreads. 

Traders need to understand Forex spreads as they are the primary cost of trading currencies. Our post will address forex spreads, how they work and how to keep an eye on them to increase your trading success. 

What is a spread in Forex? 

Every trading market has a spread, and so does Forex. A spread is basically the difference between buying and selling prices of the assets you're currently trading. Traders who are familiar with equities will typically call this bid: ask spread. 

To put it simply, consider that when you purchase a brand-new car, you give the market price for it. But as the car leaves the lot, it begins to depreciate, and if you wanted to sell it right back to the dealer, you would have taken a much lower price for it. 

Depreciation is also a game-changer in the Forex market. It explains the change in the car example, while the dealer's profit explains the change in a forex trade. 

Here's another example: 

If the EUR/USD Bid price is 1.16909, and the Ask price is 1.16919, the spread is then 1 pip. But if the Ask price is higher with 1.16949, the spread would be 4 pips. When trading Forex, you can make a profit based on the change of the currency pair. But that may only be possible if the currency price has crossed the spread. 

As you may have already seen, spreads in Forex are measured by small movements known as pips- which is any difference in the fourth decimal place of a currency pair. But it isn't just the spread that will determine the total cost of your spread - the lot size also plays a key role.

The point of a forex trade is to buy one currency pair and sell another. The sell price is the base currency, and the buy price is the quote currency. When trading Forex, the bid price is the price of buying the base currency, while the ask price is the price of selling it. 

Why does the spread change when trading Forex? 

The spread in forex changes when the gap between the base currency and the quote currency pairs changes. This is known as a variable spread - the opposite of a fixed spread. Forex traders will always deal with a variable spread. 

And whenever there's an event or important news announcement that causes higher market volatility, the forex spread may increase. One of the disadvantages of a variable spread is that your trading position could be closed, or you will be placed on a margin call if the spread increases considerably. 

Who determines the spread?

Unlike the New York Stock Exchange, where trading traditionally took place in a physical space, the forex market has always been virtual and operates mostly like a retail market for smaller stocks, where trades are coordinated by experts called "market makers".   

Because buyers and sellers are often located in different regions, an intermediary is needed to coordinate the transaction. The thing is, one of several market makers may even be in a third city. His duties are to assure an organized flow of buy and sell orders for those currencies, which involves finding a buyer for a seller and vice versa. 

However, the work of market makers involves some degree of risk. There are situations where they agree on a particular bid or buy order at a given price, but before finding a seller, the value of the currency increases. 

The market maker is still accountable for filling the agreed buy order and may have to accept a higher sell order than the buy order they have committed to the trade. Because the market makers accept the risk and facilitate the trade, they also reserve the right to retain a part of the trade. That part is called the "spread".  

Low spread scalping 

When it comes to taking advantage of low spreads, Forex scalping provides many opportunities for traders. This strategy refers to a method where you open and close positions within a few minutes or seconds of each other, with the intention of making small profits which can be accrued over time to result in more significant profits. 

By quickly opening and liquidating positions in a time frame, you can make considerable gains without subjecting your account to market volition, which can impact trades that are left open for much longer. But in order to scalp the tightest trading spreads in Forex industry, you will first need a reliable low spread broker. One that has particularly low costs and spreads when compared to other brokers in the industry. 

It's also considered a smart move to keep an eye on changes in the spread regardless of with whom you choose to trade. News is a popular time of market volatility. Releases on the economic calendar rarely happen and, depending on whether expectations are met, can cause prices to change rapidly. 

Similar to retail traders, large liquidity providers fail to fully understand the outcome of news events before their release. That means they look to compensate for some of their risks by widening spreads.  

If you're new to the forex world, we recommend reading everything you can about Forex trading in order to gain valuable experiences and better insights on the market and ways to trade.