Before we talk about what a spread is you should understand that in the Forex market the prices are represented as currency pairs or exchange rate quotation where the relative value of one currency unit is denominated in the units of another currency. An exchange rate that applied to a client who is willing to purchase a quote currency is called BID. That the highest price where a currency pair will be bought. And a price of quote currency selling is called ASK. That is the lowest price where a currency pair will be offered for sale. Please have in mind that BID is always lower than ASK. The difference between ASK and BID is called the spread which represents broker service costs and replaces transactions fees. The spread is traditionally denoted in pips: a percentage in point meaning fourth decimal place in currency quotation.
In the following you can find some types of spreads which are used in Forex Trading:
Fixed spread: It means that the difference between ASK and BID is kept constant and do not depend on the market conditions. Fixed spreads are set by dealing firms for automatically traded accounts.
Fixed spread with an extension: It means that it is a certain part of a spread that is predetermined and another part may be adjusted by a dealer according to the market.
Variable spread: It means that the spread fluctuates in correlation with market conditions. Normally the variable spread is low during times of market inactivity (usually about 1-2 pips) but during a volatile market it can widen to 40-50 pips. This type of spread is closer to the real market but it brings higher uncertainty to trade and of course makes a developing of an effective system more difficult.
Observing the variable spread graph you could define moments if the value of the spread reaches its extremes – either maximum or minimum. On the moment when there is a minimal spread (between 0 to 1 pips) you can open simultaneously buy and sell trades and later close both of them on the moment of maximal spread. As a result the profit will be equal to the maximal spread value. This trading system under variable spread conditions has an advantage of low risks involved because the profit probability does not depend in this case on actual currency pair quotation but only on the spread value. Furthermore when the trading position is open during a minimal spread it can guarantee you a breakeven result and makes profit earning highly possible.