Some forex traders would ask if forex spreads are really necessary. Why could currency pairs simply be bought and sold for their market prices? The answer to this question is simple and straightforward: forex trading is a money-making business. Everybody who gets into forex trading is in it for the money. This includes not only the forex traders but the forex brokers, too. Forex brokers will have to get paid somehow for the services that they render to forex traders. Since there are no professional fees or commissions that are directly paid to forex brokers, forex spreads take care of their operational costs.
And so, a pricing scheme was devised in order for forex brokers to gain from the transactions that forex traders make. Whether you buy or sell your currency pairs, your broker will have his share of the forex spreads. When your forex broker quotes you the bid-ask prices on your currency pairs, he takes the difference between the two prices as his share of the transaction. The forex trader does not always end up taking 100% of the spread since there could be a difference in the market prices by the time the trades are executed. There are also strategies that forex brokers might turn to in order to skirt smaller spreads and earn more – although, this is not always advantageous to the traders.
From the business point of view, yes, it is necessary to have reasonable forex spreads. But, the trades where these spreads are used should be reasonable and have equitable results for both traders and brokers. Forex brokers give indications of the levels of spreads that they offer when they advertise their services. It would be easy for forex traders to be blinded by these spreads that they fail to consider other factors in their decision. Spreads are not the only determinants of profitability – they are, in fact, not a guarantee that you will reap earnings in all your trades.
All traders want to be able to buy their currencies low and then sell them for higher. Simple math will show how much income this yields. But, more complex computations go into actually realizing profits from forex trading activities. There are other factors that you have to consider before you even consider your forex spreads. The reliability and trustworthiness of your forex broker are among the first things you have to consider. When you have a trusted forex broker, you can be sure that the spreads that you are being offered are reasonable.
Just as it is necessary for you to deal with mark-ups and taxes as add-ons to the costs of your basic goods and services, forex spreads are likewise a necessary part of forex trading. The expert attention and competent service with which your forex broker handles your forex trading transactions can be compensated with his share in the trading spreads. A scrupulous forex trader might offer the lowest spreads and yet not bring your profits when trades go in the wrong direction or when the trades are not executed at the right time.