What is a spread?
To understand a bull currency spread, one first needs to understand what a spread is. This term refers to the difference between a party’s highest buying price and lowest selling price of a currency pair, and is typically represented by pips, or a ‘percentage in point’ (the fourth decimal place of a currency price). A spread often takes the place of transaction fees or commissions when trading through platforms such as ForexCT, and with us, the spread will always be fixed to help mitigate losses from substantial fluctuations in currency fluctuations.
What is a bull currency spread?
Depending on your strategy, trading the foreign exchange market involves not only leveraging the volatility of currency values but also using methods to limit the risks of extreme price changes. If a trader believes a currency is about to moderately appreciate in value, they may sometimes buy what are called bull spread contracts. A bull spread essentially puts a limit on both the lower limits of potential costs and the upper limit of potential gains for the trader, based on predefined ‘Floor’ and ‘Ceiling’ pip values.
When can I trade a bull currency spread?
Bull spreads have a set expiration time, and you can actively trade them at any point up until their expiration. If the currency price falls leading up to the expiration of that bull spread rather than rises, you do risk making a loss. In some cases, traders will trade early to avoid making the maximum set loss as defined by the bull spread.
What are the pros and cons of a bull spread?
One of the advantages of a bull spread is that both the maximum possible profit and loss is known beforehand. Of course, this also means that if the price does go above what is expected the trader will forego any gains past what they have locked in with that bull spread contract.
Bull currency spreads can be a useful way to navigate spikes in currency prices in response to major news stories and other effects but, as with every trading strategy, there will always be benefits and risks.