What is the meaning of the term 'spread' in foreign exchange?

The term 'spread' in foreign exchange refers specifically to the difference between the buying and selling prices of a currency pair. This is a crucial concept in forex trading because the spread indicates the cost of executing a transaction for traders. When a trader wants to buy a currency pair, they pay the higher price known as the ask price, while when they sell, they receive the lower price known as the bid price. The difference between these two prices is the spread, which can vary depending on market conditions, liquidity, and the broker’s pricing.

A narrow spread often indicates a more liquid market, where there are many buyers and sellers, while a wider spread could suggest less liquidity or more volatility. Understanding the spread is essential for traders as it directly impacts their potential profit or loss on trades. This concept is fundamental in forex as it highlights the cost of trading and helps traders make more informed decisions.