Spread

The spread is the difference between the bid price and the ask price a broker is quoting.

The spread is the difference between the bid price and the ask price; therefore, it’s also known as the bid-ask spread. When brokers deal in financial markets, they try to buy at a lower price and sell at a higher.

If the price of EUR/GBP is 0.86330 (BID) / 0.863337 (ASK), you will get the spread by subtracting one from the other, which in this case is 0.7 pips.

Calculation: ask price – bid price = spread

Sometimes traders refer to the spread in points, as it’s easier to pronounce whole numbers than decimals. Instead of saying zero-point-seven pips, you could say, seven points.

Traders are concerned by spreads because they are considered a cost and barrier to profitability. When you enter a trade, you may notice the profit & loss of your position is negative; it happens because of the spread. The greater the spread, the more the market has to move in your favour to reach break-even.

If the spread is 0.7 pips, it means when you open a position, it will be negative 0.7 pips. Since the ultimate goal of trading is to close your positions in profit, the lower the spread, the closer you are to profit. The wider the spread, the more the market needs to move in your favour to reach profitability.

The cost of the spread depends on the pip value and position size. The pip value of one lot of EUR/GBP is £10; therefore, a spread of 0.7 pips is £7 per lot.

Calculation: pip value * spread = cost per lot

Supposing the position is for 0.1 lots. In that case, the cost implications of the spread are £0.70.

Calculation: (pip value * spread) * position size = cost