In addition to being the difference between the Bid & Ask prices, the Spread is also the cost of trading.
This cost can vary depending on the financial asset being traded, market volatility, supply and demand conditions, and the specific broker. The higher the liquidity, the lower the spreads will be.
How to calculate spread
As mentioned before, the spread represents the diffrence between ask and bid prices.
Spread = Ask Price - Bid Price
In the example below, the ask price is 2,791.51 and the bid price is 2,791.13, meaning the spread was 0.38 at that moment. Which is the same value indicated by the red arrow.
The grey area between the green and red lines also represents the spread, as it lies between the bid and ask prices.
The effects of spread
The primary effect of the spread is noticeable when the trader opens a position. For example, when a position is initiated, the trade result starts off negative, regardless of the trade side.
This occurs because when a buy position is opened, the buy price matches the ask price, and the platform displays results based on the bid price, since closing a buy position requires a sell order. Similarly, when a sell position is opened, the sell price matches the bid price, and the platform shows results based on the ask price, as closing a sell position requires a buy order. As a rule, the bid price is always lower than the ask price.
That is why the spread can be interpreted as a cost.
Monitoring spread through Watchlist
By using the Watchlist tool, it is possible to monitor, compare and ordinate the spreads of many different assets. To do this, access the Tools menu and select Watchlist.
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