Don’t you know what spread is?
The spread is the difference between the bid price and the ask price. The spread is going to be measured in pips.
As we have seen in the blog post “How to measure price and investment”, a pip is the minimum variation that the price can have. That is, for a Forex asset trading to the fifth decimal place, a pip will be equal to a price increase or decrease of 0.0001.
For example, if the EURUSD goes from 1.1256 to 1.1257, it will have had an increase of 1 pip.
In forex there are also assets that quote to the third decimal place, as for example the EURJPY, in this case, 1 pip will be equal to the increase (or decrease) of 0.01.
BID and ASK
Forex is one of the most traded markets in the world. In this case, assets can have a bid and an ask price.
We must be clear that the term “bid” shows the price for which the majority of market players are willing to buy a certain asset.
On the other hand, the term “ask” is used to provide the price at which the owners of a certain asset are willing to sell it.
Spread and liquidity of the asset
The spread should be the smaller the better. Because if it is large, just by entering the market, you are already losing money, because you will have to exit at a worse price.
If the spread is very large, it means that the asset has very little liquidity. For example, if there are only 2 people and one of them wants to sell at 120€ and the other does not want to buy for more than 80€ (spread of 40€), it will be difficult to reach an agreement (buy-sell).
However, if there are 20,000 people in the market trading in that asset, the buying and selling prices will be much more disparate, and the sellers will be moving around 95.86€ (for example) and the buyers around 95.82€ (spread of 0.04€). In this case it is much easier to have buy and sell operations.
That is why the spread is a measure of the liquidity of an asset. The lower the spread, the more liquid the asset in question will be, and the more options we will have to buy at the price we want.