When you look at most financial markets, you’ll see two prices: buy price and sell price. The difference between the buy and the sell price is called the spread.
It’s a simple concept, but one that you’ll come across often when trading financial markets – and it could have a significant impact on the profitability of your trades.
WHY IS THE SPREAD IMPORTANT?
Tighter spreads tend to mean lower trading costs, this is because a tighter spread means that the market price doesn’t have to move as far from your entry price for your trade to become profitable.
WHAT CHANGE THE SPREAD?
Other than pricing, a number of factors can influence the size of the spread.
In general, the more people who are buying and selling a particular market (Volume), the tighter its spread. If there are fewer participants, spreads tend to widen.
Volatility, such as that brought about by major news or economic announcements, can cause large market movements that lead to increased spreads. This is to cover the increased risk of volatile markets.
GOLDEN RULE IN TRADING
- Buy Orders - You always BUY (open) at ask price, you always SELL (close) at the bid price.
- Sell Orders - You always SELL (open) at the bid price and BUY (close) at the asking price.
- Remember - In the charts, you usually see the BID price (SELL price).