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What Is a Bid-Ask Spread

In finance and the trading world, the word Spread can have many meanings, but they all refer to the differences between two prices, but most of the time they refer to the gap between the ask and bid prices of a symbol which everyone knows as the bid-ask spread. We are going to talk about the bid-ask spread as this relates to the cTrader trading platform and how brokers use this with the instruments that they offer.

 

Bid-Ask Spread

With the brokers that use the cTrader trading platform a symbol with a spread of 0.5 pips means that the difference between the bid price and the asking price is 0.5 pips, this is where most brokers make their markup & handling fees, am example is shown below.

 

A buy market order is submitted and filled at the bid price for EURUSD and the spread at that time was 0.5 pips, this means that the trader's position is losing 0.5 pips from the start, so the broker takes this as their fees, the position would need to increase 0.5 pips just to break-even, once it has gained 0.5 pips and gone above this, then the trader is in profit minus commission fees, which is a separate subject. If a take profit target is set, then it is the Asking price which has to reach this price to close the position and if a position is closed by the trader than also it is the asking price which is used.

* The reverse applies to a sell order.

 

Bid-Ask Spread Fluctuation

The value of the bid-ask spread is not static, so in the example, above it will never stay at 0.5, it could drop to 0.1 or go much above 1-pip, this usually depends on the broker, so it is worth finding out what the spread is for the symbol you want to trade.

The spread can be influenced by the supply and demand and can widen (get bigger) or narrow (get smaller); also, volatility in the market can widen the spread and when volatility is low, and there is uncertainty the risk is at a minimum so that the bid-ask spread will narrow.

 

Stop-Loss Lower than the Symbol Spread

Something that catches out many traders is that they do not fully understand that if the broker charges a fee for a symbol in the form of the bid/ask spread, then if a stop loss is set which is lower then the spread the trade will close as soon as the order is filled at a loss.

 

XAUUSD - Spread 20 pips, stop loss set at 15-pips, position will close as it is less than 20-pips.

* recommended stop should be much higher, probably at least 200 pips, which is roughly 10-pips for a Forex symbol.