In forex trading, the term “spread” refers to the difference between the bid price and the ask price of a currency pair. The bid price is the price at which the market is willing to buy a currency, while the ask price is the price at which the market is willing to sell it. The spread represents the cost of executing a trade and is typically measured in pips, which is the smallest unit of price movement in the forex market.
During market open hours, when trading activity is high and liquidity is abundant, spreads tend to be relatively tight. This means that the difference between the bid and ask prices is small. Tight spreads are advantageous for traders because they reduce the transaction costs and make it easier to enter and exit trades.
After hours, when the trading volume decreases and liquidity may become thinner, spreads can widen. This is particularly noticeable during the overlap of trading sessions when multiple financial centers are active, such as the overlap of the New York and London sessions. During these periods, spreads may temporarily widen due to reduced liquidity and the potential for increased volatility.
Widening spreads can have implications for traders. They increase the cost of executing trades, as the difference between the bid and ask prices becomes larger. Moreover, wider spreads can lead to slippage, where the executed price of a trade differs from the expected price, potentially resulting in unfavorable outcomes for traders.
It’s worth noting that spreads can vary among different currency pairs and also depend on the specific forex broker you are trading with. Each broker sets its own spreads, and some may offer tighter spreads than others. Additionally, market conditions, economic news releases, and other factors can influence spreads, causing them to fluctuate throughout the trading day.
