*What is market price spread, how to calculate and how to minimise it!*
I have had a quite a few direct messages asking about market price spreads and what they are and how it affects your trading so I have decided to dedicate a whole blog post to the topic. Grab a beer, sit back and enjoy a nice long blog post all about price spreads in the world of financial market trading.
Lets start with the main terminology used when talking about the “spread” of the price of a financial instrument, yield or rate.
Bid Price – The price at which buyers are willing to buy at.
Ask Price – The price at which sellers are willing to sell at.
Spread – The difference between the bid price and ask price.
The above image is taken from my MetaTrader 4 trading platform and is a screenshot of the bid price and ask price for the GBPUSD fx currency pair on the 23rd June 2019. As you can see, there is a difference between the price sellers are willing to sell at (RED line @ 1.24453) and the price buyers are willing to buy at (BLUE line @ 1.24440).
The difference between the bid price and ask price is the spread which in this example is 1.3 pips.
So what does this mean?
Well, your price charts most likely display the mid price which is the mid point between the spread. So if you are looking at the line chart or candlestick chart for GBPUSD at the point I took the picture above then the price would be showing at around 1.24446. As the title of this blog post suggests, you will almost never be able to buy or sell at the current market price (mid price) because then your broker and liquidity provider will be unable to make money from you. Therefore, the spread is a cost of trading.
If you were to buy 1 lots of GBPUSD at the rates shown above you it would cost you $124,453. This is because your order would be executed at the ask price which is the price sellers are asking for their GBP in exchange for USD. Now, if you were to immediately sell your 1 lot of GBPUSD you would lose $13 because your sell order would be executed at the bid price, the price buyers are willing to pay.
The total spread is $13 and this is a cost of trading and why you should look to find a broker and trade when there is as small a spread as possible.
Ask Price – Price you can BUY at (for long orders).
Bid Price – Price you can SELL at (for short orders).
Alternatively, if you close out of a long position you will then be offered the bid price and if you close out of a short positions you will be offered the ask price.
Top Tip: Always check the current spread and bid/ask prices of the instrument you are trading before you place your market order.
Spreads are variable.
The spread for almost all financial markets are variable. This means they can change and get smaller or bigger with the changes in liquidity and volume that are coming in to the markets. This is why it is very important to check the current spread before entering a position because at certain times of the day and in certain market conditions, spread can widen to over 10x the average.
The most common time for when spreads widen is at the 10pm (GMT) market open on a Sunday night and the 10pm session switchover (US and Sydney). This is because of lack of liquidity at the change over. It is not uncommon to see the spread on FX currency pairs go from 1-2 pips to over 10 pips in size.
Another time that you will often seen spreads widen is before high impact news announcements. This is normally initiated by the broker or liquidity provider in an effort to avoid negative slippage that will cost them money if price moves sharply in a direction and orders are not placed as quickly as normal.
Below is a table with a showing the spreads offered by my chosen broker which is IC Markets on a multitude of financial instruments.
If you click on the images above it will take you to their website where you can find out more information about the benefits of using a good broker.
Differences between brokers.
The main difference between brokers is the average spreads that they charge on trading. This is the difference between a good broker with low spreads and therefore low costs of trading which benefit you as a trader in the long term. Better brokers tend to have access to larger and more efficient pools of liquidity and this is why they can offer lower spreads and better pricing.
Less well known and worse brokers often use very small pools of liquidity or even go as far as to take the opposite sides of your trades. This often leads to larger spreads and volatility within the trading platform and by taking the other sides of your trades, the broker is effectively wanting you to fail and profiting from it when you do.
Top Tip: It costs very little time and effort to swap brokers and can be done in a matter of days. Go and check the current spreads offered by your broker and see how they compare to others like IC Markets or Vantage FX.
If you have any questions regarding spread prices, brokerage and trading platforms then please message me or leave a comment on this post. Please don’t forget to LIKE, SHARE and FOLLOW the blog to stay up to date with the latest blog posts and analysis 🙂