What is the spread when it comes to trading Forex?
The spread is one of the most basic terms in trading and investment. Therefore, you have to know what it means and represents if you want to trade currencies and invest in the market.
In this article, we're going to see :
- What the spread is - How to measure it on the Forex market - The best MetaTrader Spread indicator - Why the spread is important for your trading performances (profitability)
Spread Forex – Definition
On the stock exchange as on the Forex market, the spread is the difference between the buy and the sell price. In other words, the spread represents the difference between the demand and the supply price (Bid and Ask).
From the point of view of an online broker, the spread is one of its major sources of income, with commissions and swap fees.
How to measure the spread
The difference between the buy and the sell price is measured in "pips" or in "points". In the currency market, a pip is usually the last decimal place in the exchange rate (most pairs have four decimal places, except the Japanese Yen which has only two). For example, let's say the Euro is being traded at 1.1234 / 1.1235 against the US Dollar. The difference between the supply and the demand is 0,0001. It means that in this example, the spread is equal to one pip.
On the stock exchange, the spread is the difference between the bid and the ask price of a security.
The spread can be fixed or variable and is proportional to the size of your position (volume). When it's variable, it varies with the volatility of prices and from a broker to another. The most traded currency pair is the Euro against the US Dollar (EURUSD), which is why the spread is lower.
Brokers usually take the spread at the moment your position is being opened, which is why trades start out negative. This is a very easy way to see your broker's fees.
Each online broker publishes on its "Contract Specifications" page the average spread applied. With Admiral Markets, a typical spread on CFDs CAC40 and DAX30 is 0,8 point, and 0,8 pip on EURUSD during main trading hours.
Spread calculation example
The value of the spread depends on the size of the negotiated contract and on the value of a point (or a pip) for this contract size.
On Forex for example, the value of a point per contract is 10 units of the settlement currency (second currency). On EURUSD, the value of the point is 10 USD.
If the EURUSD spread is 0,8 point and you're trading one contract, your spread will be 8 USD (then converted in Euro). If you're trading 10 EURUSD contracts, your spread will be 80 USD (then converted in Euro).
Spread example on CFD CAC40 or DAX30 :
For one standard lot (one standard lot equals a 100 000 units of the settlement currency contract) CFD CAC40 or DAX30, the spread is 0,8 point. The value of the point is 10 euros per lot, so the spread for one standard lot CFD CAC40 or DAX30 is 8 euros.
Values of a point and contract sizes may vary between brokers. When looking at spreads between brokers, don't hesitate to check that you're comparing the same contract size.
With Admiral Markets, you can use a demonstration account to check live spreads on your platform or make the calculation using the Trading Calculator.
Influencing factors on the spread
- The liquidity of the underlying financial instrument
- Market conditions
- The volume traded on a financial instrument
Spreads depend on the underlying asset. The more an asset is traded, the more its market is liquid. This means a tight gap between supply and demand, which leads to small spreads. On less liquid markets like natural gas, brokerage fees are more important.
Depending on the broker's offer, you can have fixed or variable spreads. It is good to know that usually, fixed spreads aren't guaranteed by brokers during high volatility periods or when important news is released.
Spreads may vary according to market conditions: they are usually higher when news is published and most brokers aren't able to guarantee them during those news and high volatility periods.
If you're thinking about trading during a European Central Bank reunion or while the FED is making an announcement, it cannot be assumed that brokerage fees would be the same as usual.
Forex account without spread
You're maybe wondering if it's possible to trade forex without spread?
No dealing desk accounts or ECN accounts are free of brokerage fees. Instead of having the spread from the broker to pay, you have the interbank one (for example: 0,1 to 0,2 pip on EURUSD).
In this case, the broker will charge a fixed fee for each traded contract (the broker as to take a commission for giving an access to the market).
With Admiral Markets, the spread less forex account is the Admiral Prime one, and the fee for each traded contract is 6 euros: 3 euros when the position is opened, and 3 when it's closed.
Which is the best Forex spread
The best forex spread is the interbank one. It is the real forex market spread and it represents the true difference between the supply and the demand on exchange rates. To get access to interbank spreads, you need an ECN account. On this kind of forex account, the investor only pays a fee for each contract and then gets access to interbank spreads.
How to see the spread on MetaTrader 4
Once your MetaTrader 4 platform is opened, you then go to the "Market Watch" section if it's not already opened on the left part of your screen.
You now have two solutions which are already included in the MT4 platform :
- Right-click on the mouse anywhere in the "Market Watch" section and click on "spread". Thanks to this manipulation, the spread will be displayed after the "Bid" and "Ask" quotations in real time.
- On an MT4 chart, right click anywhere and click on "Properties". This manipulation opens a window linked to your chart. All you have to do is go to the "common" section, tick the box "Show Ask line" and click "Ok".
For the second option, the spread will be displayed with a red line (which represents the Ask price). The spread is the difference between the actual quotation and the Ask price.
However, other solutions exist to show the spread on an MT4 chart.
Tools from the MetaTrader 4 Supreme Edition, available with Admiral Markets, allow you to see the spread in a more useful and detailed way. Those tools are :
The "Admiral Spread Indicator"
This indicator allows you to visualize the asset's spread in real-time in the chart's window. It also shows its history from when the indicator was applied to the chart.
To use this indicator, you have to make it slide on the desired chart and click "Ok". An additional part goes on the bottom of the chart and shows the real-time evolution of the spread and its exact value (wrote in red on the left part), above the Admiral Markets label.
The Expert Advisor (EA) "Admiral Mini Terminal"
This EA is mainly used for :
- A quick position taking
- A quick and effective position management
Nevertheless, the Mini Terminal displayed includes the real time spread, situated between the buy and the sell button, which allows a permanent knowledge of the spread without having to reduce the size of your chart because of the "Market Watch".
To use this EA, you have to make it slide on the desired chart and click "Ok". A small additional window goes on the top left corner of the chart where you can find the spread value.
Forex Spread Indicator on MT4
In an efficient trading strategy, brokerage fees aren't negligible. It can be interesting to have a visual expression of the fees applied by the broker and of the impact of the market volatility on the spread.
The MT4 Spread Indicator is a tool to measure and display brokerage fees of an asset. Once applied to the chart, it displays the spread until the end of the period. The provided information are :
- Average spread per period of time
By default, MetaTrader doesn't offer to display the spread. That's why experts advisors are being developed to provide traders with this information. With Admiral Markets, you can get this MT4 Spread Indicator in the MetaTrader 4 Supreme Edition.
Experienced traders are always looking for lower spreads among brokers. This fact is particularly true for currency scalpers, whom for brokerage fees are very important.
Spreads among brokers may vary, but it is important to be careful with very low spreads or free fees trading accounts. A lot of trading scams promise accounts without spreads or fees with the goal of convincing you to make a money deposit (which would probably lead to complications if a withdrawal is asked).
Brokerage fees are the essential remuneration of a broker. The money collected can be used for future developments of trading services or platforms. Be careful, the lowest spread doesn't guarantee a good order execution. It is important to not look for the cheapest solution as brokerage fees are partly made to improve services, but for the price/quality ratio.
How to download the MT4 Spread Indicator
The MT4 spread isn't displayed by default, which is the reason why the MT4 Spread Indicator is required.
For some traders, it can be very useful to have access to the spread at any given moment.
The easiest way to download the spread indicator is by downloading the MetaTrader 4 Supreme Edition (MT4SE). MT4SE is a plugin which allows to extend MT4's functionalities, by offering a much larger choice of indicators and many customizable options.
The MT4 Expert Advisor is a spread indicator under the shape of an EA, available in the MetaTrader 4 Supreme Edition of Admiral Markets. The installation of the spread indicator (.mq4) is automatic once the MTSE pack is installed. Then, you can display the spread directly on the platform.
The benefit of this method is that a good spread indicator is available among the multiple functionalities offered by the MetaTrader 4 Supreme Edition when downloaded.
The following screen-shot allows you to observe the spread indicator in the MetaTrader 4 window after the installation of the MT4SE plugin.
As you may see, the spread indicator is only one of the multiple tools available in the MT4SE Indicator Pack.
When double-clicking on the MT4SE Indicator Pack just above, you open a dialog window which allows you to have access to the indicator's functionalities and its settings. Thanks to this, you can customize the shape of an indicator by changing colors, fonts, sizes, location.
The current value of the spread is displayed directly on the sectioned chart (in red by default), as you can see on the screen-shot above. The font by default has been enlarged and the displayed location modified by raising the value of the Y coordinate in the settings.
On some assets, we may observe a fixed spread (or almost). The indicator will be useless in this particular case. However, this tool becomes very useful when the spread is variable.
To function, the indicator measures the spread and continuously displays it in real time. When it's opened, the MT4 Spread Indicator registers continuously the spread's value. This allows you by looking at your chart to see the past information about the spread.
You may see that past values of the spread are visible in red and green in a window under the chart's one. The red bars' top indicates the largest spread registered for each candle. Inversely, the green bars' bottom indicates the lowest spread registered for each candle. Those elements can help in the decision-making process.
Why it is important to know the spread value when trading
Each trader has a different sensibility when it comes to the size of the spread. This sensibility has to depend on the trading strategy you're using. If you're trading on a short time frame and making lots of transactions, it is important to be careful about the size of the spread at any time.
If you're a swing trader, looking to accumulate a big amount of pips over weeks or months, the size of the spread doesn't matter that much in comparison of the movement aimed. However, if you're a day trader or a scalper, the spread size can make a huge difference between losses and profits.
If you often enter and exit the market, transaction fees are going to accumulate. If you can't avoid it because of your strategy, make sure you open your trades when the spread isn't too important.
It is usually wise to combine different indicators (for example, using two additional indicators to validate information given by the main indicator). A spread indicator can be used as the last filter of a strategy to decide to enter on the market, by avoiding critical periods.
You may note that this isn't useful for every trader. If you're using a trading strategy which allows you to only open a few positions, it is very unlikely that you would add a filter which excludes you to enter on the market when the spread's value is higher than usual. By contrast, if you have a trading strategy involving a lot of positions (aiming each time a few pips/points), it can be essential to stay away from the market when the spread's value is too high.
For example, let's say that you downloaded and installed MetaTrader 4 Supreme Edition, and you decide to use the Admiral Keltner Indicator as your main indicator to find trading opportunities. The Keltner Channel Indicator draws a straight line on the chart, which helps to recognize supports and resistances.
You may adopt a short-term trading strategy, by analyzing an hourly chart and selling if the market reaches the top boundary or buying if the market reaches the bottom one. Then, you can apply a filter in order to improve the performances of the main indicator.
Let's say you're looking at a 100-period simple moving average and a 25-period simple moving average in order to determine the long term trend. If the fast SMA (25-period Simple Moving Average) is below the slow SMA (100-period Simple Moving Average), it indicates that you're in a bearish trend. If the fast SMA is above the slow one, then it indicates a bullish trend.
An option for you is to follow the trading opportunities given by your main indicator but only if they are in the same direction as the long-term trend. This filter only allows you to open a buy order if the fast SMA is above the slow one, and a sell order is the fast SMA is below the slow one.
As a last confirmation signal for opening a trade, you can use the spread indicator. You can look at the history available to find hours where spreads are more important (and avoid them). Therefore, you'll only open trades when the spread is at its usual value or below.
Of course, the previous example is to be taken as a demonstration more than as a trading strategy. Before using any trading strategy, it should be tested in risk-free environment, such as demonstration accounts we can provide.