Forex Trading

How much does it cost for a trader to make a trade?

Traders do not take positions on a currency pair at the exact rate at which the currencies are trading. Instead, there are two rates for the currency pair: the bid rate and the ask rate.

• The bid rate is the price at which traders can Bid the pair.

• The ask rate is the price at which traders can Ask the pair.

This is an example of a currency pair. The ask (Ask) rate is higher than the bid (Bid) rate and the spread is 3 pips, meaning that if a trader Asks this pair, then the Bid rate of this pair will have to go up 3 pips in order for the trader to break even.

The ask rate will always be higher than the bid rate. The difference between the bid rate and the ask rate is the spread. The spread is an automatic cost that the trader incurs when making the trade. Because of this spread, traders will take a position they started with a small loss and will need to gain some profit in order to break even.

For example, if a trader Asks into a position at the ask rate, and then immediately closes the position at the bid rate, the trader will incur a cost equal to the spread.
These spreads are seen in every kind of market. However, because of the broker-based system in the equities and futures market, it can sometimes be difficult to identify where and how much the spread cost is.