FOREX TRADING- The Basics Explained in Simple Terms ( PDFDrive.com )

reputable brokers, there is rarely an issue with price differentials.
I mentioned the term the 'spread' earlier, which is the difference between the bid and
the ask prices. It was only a few years ago that the spread on the EUR and JPY were
3 pips, and the other major pairs ranged from 4-5 pips, and this was happily
accepted by all. Nowadays, it is not uncommon to get spreads on the EUR and JPY
for 1 pip or less, and the other majors, for less than 3 pips, as are a few of the 2nd
tier pairs and crosses.
The spread is your cost of doing business. For you to make any profit, you must
first make up the spread. For example, if you bought the USD/CHF at 1.0774 and
you had a 3 pip spread, then the price would have to rise to 1.0777 before you are in
a break even position. Remember you buy at the ask price and sell on the bid price.
So in this case, when you bought, the quote would have been 1.0771 / 1.0774. It then
has to look like this before you can get out at breakeven 1.0774 / 1.0777, which is a
3 pip increase in price.
Some brokers maintain the same spread, albeit a little higher during all market
hours, whilst other brokers may vary the spread depending on the volatility at the
time. What is volatility? It can be when the market is very quiet, like when the
market opens early in the week, or after hours at the end of the US session before
the Asian session has cranked up. It can also refer to when there is very high
volume, normally in anticipation of a major news release. This is where some
brokers can really widen their spreads. They don't stay wide for long, but it can be 5
minutes or so. Oanda does this, and the spreads can go out to 20 pips on the volatile
pairs like the GBP/USD. This is not good if you are scalping or have a really tight
stop or other orders close to the current price. Something you have to be aware of.
You will find that if the spreads stay constant, then there is normally a trade off
somewhere else. In the case of CMS, their spreads remained constant but during the
very volatile times, you would have difficulty placing orders or stops close to the
current market price. A few years ago, just before any major news release, traders
would place a buy order and a sell order close on either side of the current price
just a few seconds before, hoping to cash in on a big price spike one way or the
other. One order would be filled and they would cancel the other, looking for a
decent run in the original direction. Brokers didn't like this and put practices in
place like I have discussed to prevent this - a bit like the casinos banning card
counters, even though it is not technically illegal, it was giving the card counters an
edge. So the casinos changed their rules to take away that edge from the punters.
Brokers do the same at times.
Then we have the problem of requotes and slippage. This should not really be an
issue with Forex trading if you stick with the better brokers, but it can and
sometimes does happen. Keep in mind, there can be times of very high volatility,