A forex broker is a dealer than participates in facilitating trading in the currency markets. A broker usually makes money solely on a commission structure but in the world of currency trading a forex broker makes money by making a spread in a number of different ways.
The spread (which is also known as the bid/ask spread), is the difference between were a forex broker will buy a currency pair and where the dealer will sell a currency pair. The dealer buys on the bid and sells on the ask or offer price and the difference is what is referred to as the spread.
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The spread allows the dealer to buy at one price and in theory sell it quickly for a price that is slightly higher if the price of the exchange rate remains constant. If the bid/ask spread is 3 pips on a currency pair such as the EUR/USD, then the forex broker gives himself an opportunity to limit his risks and exit the position with a small gain.
Many forex brokers have what is called variable spreads. This means the spread will change depending on market circumstances. For example, if the market becomes volatile, then the broker might decide to change the bid offer spread on the EUR/USD to 5 pips to avoid getting stuck with a position he does not want.
Another type of spread is a fixed spread where a broker keeps his spread constant no matter how calm or volatile the market becomes. Fixed spread allow customers to feel comfortable that they can receive a fair price no matter how volatile the market becomes. Generally a fixed spread will be more expensive in calm markets and cheaper in volatile markets. Traders should evaluate each type of spread and commission before choosing an appropriate broker.