What Is a Spread Indicator?
A spread indicator is a measure that represents the difference between the bid and ask price of a security, currency, or asset. The spread indicator is typically 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 as it relates to the bid and ask price. Usually, highly liquid currency pairs have lower spreads.
Understanding the Spread Indicator
Spreads are calculated metrics that often requires that a trader manually determine the difference between bid and ask prices. For traders trying to capture small fluctuations in the spread, determining the spread requires handling quotes with a large number following the decimal. As a result, the spread indicator fluctuates over a very narrow range.
Widely traded ETFs such as the SPY and the 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, the EUR/USD and USD/JPY are the most liquid currency pairs and have the smallest spreads, and currency pairs such as the USD/THB (Thai bhat) and USD/RUB (Russian ruble) will exhibit the widest spreads.
Traders are more likely to trade in currency pairs with small spreads because it costs less to enter and exit a trade.