What is a spread indicator?

A spread indicator is a measurement that represents the difference between the bid price and the ask price for a security, currency or asset. The spread indicator is usually used in a chart to graphically represent the spread at a glance, and is a popular tool among forex traders. The indicator, displayed as a curve, shows the direction of the spread relative to the bid and ask price. Usually, very liquid currency pairs have lower spreads.

Understanding the Spread Indicator

Spreads are calculated measures that often require a trader to manually determine the difference between bid and ask prices. For traders trying to capture small spread fluctuations, determining the spread requires dealing with quotes with a large number after the decimal. As a result, the spread indicator fluctuates over a very narrow range.

Widely traded ETFs such as SPY and QQQ have very tight spreads due to their popularity and liquidity. Whereas an asset such as an emerging market currency or an illiquid commodity contract will have a wide spread indicator.

In forex, EUR/USD and USD/JPY are the most liquid currency pairs and have the smallest spreads, and currency pairs like USD/THB (Thai bhat) and USD/RUB (Russian ruble) will present the widest spreads.

Traders are more likely to trade currency pairs with small spreads because it costs less to enter and exit a trade.

Related Posts