Understanding What Spreads Are

When you buy or sell in the financial markets, you are always given two prices. This two-way price is called the Bid-Ask spread. 
You buy at the higher price and sell at the lower price.

For example, if Bitcoin is trading at 91,145 – 91,185, we can determine three things:

• You can buy Bitcoin at 91,185.
• You can sell Bitcoin at 91,145.
• The Bid-Ask spread is 40.

The spread is the difference between the Bid price and the Ask price.

 

At TraderGuide, we pay close attention to the Bid-Ask spread because it is the most important factor in determining how cheap or expensive it is to trade with a broker.

 

 

Our research at TraderGuide has revealed that brokers adopt different approaches to Bid-Ask spreads. Some offer very competitive spreads, while others do not.

Here is an example comparing two well-known brokers, Oanda and AvaTrade, for the EUR/JPY currency pair:

• Oanda EUR/JPY Bid-Ask spread = 2.80
• AvaTrade EUR/JPY Bid-Ask spread = 1.80

 

At first glance, the difference may seem minor, but it accumulates over time. Remember, EUR/JPY is the same product, regardless of which broker you trade with.

Let’s calculate the cost of trading 1 lot per day over a year (250 trading days).

• Oanda cost: 2.80 × $10 (per lot) × 250 days = $7,000
• AvaTrade cost: 1.80 × $10 × 250 = $4,500
  
  

If you trade only EUR/JPY with Oanda for an entire year, you will pay $2,500 more for the exact same product.

Final Thoughts

Understanding the Bid-Ask spread is essential for traders, as it directly impacts the cost of trading. Even seemingly small differences in spreads can add up significantly over time, affecting overall profitability. TraderGuide’s research highlights the importance of choosing a broker with competitive spreads to minimize costs.

As shown in the comparison between Oanda and AvaTrade, traders can save thousands of dollars annually simply by selecting a broker with a tighter spread. Therefore, before committing to a broker, traders should carefully analyze spread costs and consider how they align with their trading strategy. In the long run, being mindful of such details can lead to substantial financial benefits.