Trading — Basics

An Introduction to Trading Types [ here ]

Bid/Ask Spread [ Text ; Video ; Video ; Video ; Video ; ]

Bid-Ask Spread

A full quotation is made up of 2 prices called the Bid and the Ask. The difference between these two prices is referred to as the ‘spread’. The spread is essentially the profit a broker or bank makes for you to enter the trade (your transactional cost). The wider the spread the more expensive it is for you to trade, whereas the thinner the spread the cheaper it is to enter the trade.
 
Large and frequently traded currencies usually enjoy a small bid-ask spread while small and infrequently used currencies have a large bid-ask spread.

The spread becomes more important to traders who trade frequently, such as an intraday traders or scalpers. However the spread is less important the higher the timeframe you trade.

Bid ask spread

Here you can see the bid-ask spread when you open a deal ticket within MT4. You wish to go long (buy) EURUSD and open an order window
 

Long positions

  •   The quotation reads: 1.36298 / 1.36301
  •   If you buy you will enter the market at 1.36301


Short positions

  •   The quotation reads: 1.36298 / 1.36301
  •   If you sell you will enter the market at 1.36298

In both circumstances your entry price on your P/L (profit loss) will be negative as the spread has been attached to your order. The market will have to move in your favour by the distance of the spread in order for your P/L to become zero.

Bid-ask spread is the difference between immediate best ask price and the immediate best bid price of a security. It is basically the difference between the lowest price a seller is willing to accept and the highest price buyer is willing to pay for an asset.

Market Makers try to buy securities at the bid price and sell at the ask price thus making a profit on the bid-ask spread. Thus, the size of bid-ask spread is proportional to the size of the market maker’s profit against the market risk that she or he’s exposed to.

 

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