Every time you look at the structure of forex trading, you will realize that all forex trades always conducted through a middleman. That person helping you with your trades will charge you for their services. That charge is called the spread.
The Definition of Bid-Ask Spread
Forex spread covers two prices, the bid (buying) price and the ask (selling) price of a currency. Traders have to pay every time they want to both buy and sell it, even when they want to sell it right away.
The Forex Market Makers Who Determine the Price
Different from the stock market, the forex market has always been virtual. Thus, they usually get specialists to facilitate their trades, called market makers. There are cases like the buyer may be in Hongkong, while the seller is in New York.
The market makers facilitate those trades. They even sometimes in a third city. This person is responsible to make sure an orderly flow of buy and sell orders for those currencies. That process involves finding a seller and buyers, or vice versa.
The market makers work with some degree of risk. For instance, the market maker accepts a bid or buy at a given price. Then, before he finds a seller, the value of that currency increases. In that situation, he is still responsible for filling the accepted buy order, and have to accept a sell order higher than the buy order.
Mostly, the changes in the value will be small, thus, he will still make a profit. But since he accepts the risk of a loss, he also retains part of that loss.
Manage and Minimize the Spread
There are two ways for you to minimize the spreads. One, you have to trade during the most favorable hour, which means trade when many buyers and sellers are in the market. The higher number of sellers and buyers increases competition and demand which will make market makers narrow their spreads to capture it.
Second, do not buy or sell thinly traded currency. Many market makers will compete if you trade popular currencies, like the GBP/USD pairs.
