The spread on financial markets is the difference between the buy (ask) price of an instrument and the sell (bid) price of an instrument. When placing a trade on the market, the spread is also the main cost of the position. The tighter the spread, the lower the cost of trading. The wider the spread, the higher it costs. You can also view the spread as the minimum distance the market has to move in your favour before you could start earning a profit.
For example, let’s say our EURUSD market is quoted with a buy price of 1.0984 and a sell price of 1.0983, so the spread is calculated by subtracting 1.0983 from 1.0984 - giving a total spread of 0.0001 or 1 pip. Once you’ve placed a trade on the EURUSD market and the market moves at least 1 pip in your favour, that’s when your position can begin generating profits. This is also the reason that when you first place the trade, you’ll start off making a small loss.
How to understand the cost of spread with xStation
If you’re using MT4, you would need to calculate the monetary value of the spread manually. One of xStation’s functionalities however is an advanced trading calculator which instantly determines the cost of the spread depending on your transaction size. In the example below, a 1 lot transaction on the EURUSD with a spread of 1.1 pips provides a monetary value of £8.38, for the spread.