In the technical jargon of trading, we come across many Anglo-Saxon terms, most of them obscure. This is for example the case of the spread, a key concept that every trader must know before investing his savings in the markets. So what is the trading spread, how to calculate it and which indicators to use? We will explain everything to you.
On the stock market in general, as on Forex in particular, the spread is defined as the difference between the price of the offer ( bid ) and the price of the request ( ask ).
The spread can be fixed or variable but, more often than not, online brokers apply variable spreads. It is, along with commissions and swaps, the main compensation for brokers.
The amount of the spread fluctuates according to the brokers but also according to certain factors, among which:
Brokers have the obligation to publish the typical spread trading they apply for each of the financial products offered in order to comply with the requirements of the European regulatory authority (ESMA).
The spread is calculated in a very simple way: you just have to make the difference between the purchase price and the sale price. The value obtained is expressed in pips or points. We then speak of spread pip or spread point.
The value of the spread then depends on the contract size you are trading and the point value per contract.
Take for example a CFD CAC 40 lot with a spread of 0.8 point. The pip value is 1 euro per lot. The spread paid per contract is therefore 80 cents.
The amount of the spread is often taken when opening the position. We can thus see very clearly the brokerage fees applied by the broker.
In the Forex market, the pip, or point, corresponds to the fourth digit after the decimal of an exchange rate.
For example, on a EUR USD pair quoted at 1.1234/1.1235, the difference between bid and ask is:
1.1235 – 1.1234 = 0.0001
The EUR USD Forex spread here is therefore 1 pip, or 1 point.
Since the point value on EUR/USD is 10 USD, if you trade 10 EURUSD lots, then your spread in euros will be 80 USD.
The lowest Forex spreads are usually those for the EUR USD pair as it is the most traded pair.
The MetaTrader 4 trading platform offers by default 2 ways to view the spread:
There are also technical indicators that provide access to the spread in a more convenient and detailed way. For example, the Spread Indicator , available on the MetaTrader 4 Supreme Edition platform, allows you to view both the spread in real time and its history.