What is Spread in Trading | Trading Basics 📚
It turned out that many newbie traders completely neglect spreads in their trading.
In this post, we will discuss what is the market spread and how it can occasionally spoil a seemingly good trade.
💱No matter what financial instrument we trade, in order to buy the asset we need to have a counterpart that is willing to sell it to us and vice versa, if we want to sell the asset, we need to have someone to sell it to.
The market provides a convenient exchange between buyers and sellers. The asset price is determined by a current supply and demand.
However, even the most liquid markets have two prices: bid and ask.
🙋♂️Ask price represents the lowest price the market participants are willing to sell the asset to you, while 🙇♂️bid price shows the highest price the market participants are willing to buy the asset from you.
Bid and ask price are almost never equal. The difference between them is called the spread.
📈The spread size depends on liquidity of the market.
📍Higher liquidity implies bigger trading volumes and greater number of market participants, making it easier for them to make an exchange.
On such markets we see lower spreads.
📍From the other side, less liquid markets are categorized with low trading volumes, making it harder for the market participants to find a counterpart for the exchange.
On such market, spreads are usually high.
For example, current EURUSD price is 1.0249 / 1.0269.
Bid price is 1.0249 - you open short position on that price.
Ask price is 1.0269 - you open long position on that price.
The spread is 2 pips.
❗️Spreads must always be considered in a calculation of a risk to reward ratio for the trade. For scalpers and day traders, higher than usual spread may spoil a seemingly good trade.
Always check spreads before you open the trade.
In 2020, for example, we saw unusually high spreads on Gold during UK/NY trading sessions. Spreads were so high that I did not manage to open a trade for a couple of days.
Not considering spreads in such a situation would cost you a lot of money.
Do you consider spread when you trade?🤓