Chapter 2: Spread, Swap & Market Hours
What Is Spread
The spread is the basic way that brokers make money from providing financial services, and the spread is the main cost for traders. Every Forex pair has a buy and sell price listed on the broker’s platform and the difference between those two is the spread.
For example, if on EUR/USD the listed bid (sell) price is 1.1302 and the ask (buy) price is 1.1304. Then, the difference is 2 pips. Therefore, the spread is two pips. This is the cost that the trader will pay on the opening of any new position on the pair. Spreads vary greatly between different brokers and different pairs. Forex brokers offer fixed and variable spreads.
What Is An Overnight Swap Rate
As the name suggests, the overnight swap rate is a fee that is paid for positions held overnight, after New York’s close. Usually, the traders pay this fee, but sometimes even brokers pay to the traders. Who pays the fee depends on the base interest rates of the currencies which are set by their respective central banks.
To better illustrate this, we will take a Forex pair with one currency with a very low interest rate Euro (0.0%) and the other with a high interest rate like the New Zealand dollar (2.25%). If the trader buys EURNZD (long Euro), then he will pay a fee to the broker because the Euro has a lower interest rate then the NZD. If he sells the pair (long NZD) then the broker will pay a fee to the trader. Note here, that for the same pair, the fee that the broker pays to the trader is smaller than the fee that the trader pays to the broker.
Forex Market Hours
The Forex market is opened 24 hours a day, Monday to Friday. However, it doesn’t necessarily mean that you will get the same opportunities by trading at any time. In fact, there is a widespread belief that better trading opportunities exist during the most active time of the market, which are the London and New York sessions, and especially the overlap of those 2 sessions.
On the other hand, trading during the Asian session (also called Tokyo and Sydney sessions) is considered less attractive.