The Importance of Low Spreads in Your Daily Trading

Price spreads are a crucial factor for traders during their daily transactions, as they directly impact their results. Price spreads represent the difference between the bid price at which a financial asset is sold and the ask price at which it is bought. The markets where the focus on the difference between the bid and ask prices is most pronounced include: foreign exchange markets (forex trading), commodities, and indices. Traders aim to minimize this spread as much as possible to improve their entry points and long-term results.

Example of Price Spreads on the Euro vs. US Dollar Pair (EURUSD):

 If the bid price for the EURUSD pair is 1.1000 and the ask price is 1.1002, then the price spread for this pair is two pips (2 PIP). In other words, as a trader, if you want to execute a buy transaction, it will be executed at the ask price, and a sell transaction will be executed at the bid price. For this reason, when the price spreads are very high, it negatively affects the trader's entry points, especially for speculators (traders who engage in fast, daily trades on short time frames).

How Can One Determine the Lowest Price Spreads for Trading?

Price spreads vary throughout the day according to market conditions. What are the main factors that affect price spreads, and what are the best times to trade with low price spreads?

-High Liquidity: Increased liquidity in the markets indicates a large number of buyers and sellers, which reduces price spreads. In summary, as a trader, you should trade during periods of high market liquidity to benefit from lower price spreads. The foreign exchange market is the largest financial market in the world, with daily liquidity exceeding 6 trillion dollars.

How Can One Identify Times of High Liquidity in the Markets?

Day trading is divided into three main sessions known as the Asian, European, and American sessions. Trading sessions represent working hours in Tokyo and Sydney (Asian session), London (European session), and New York (American session). The Asian session is known for its lower liquidity, followed by the European session, with the American session having the highest liquidity. However, the time from 8:00 AM to 12:00 PM New York EST might be considered the best for trading, representing the highest liquidity during the day due to the overlap of both the European and American sessions.

-It’s better to Avoid Trading During the Release of Important Economic Data: Economic data related to currencies are released daily, and their importance reflects in increased price spreads. For example, some of the most critical economic data include employment figures, Gross Domestic Product (GDP), and inflation data. Some of the most significant economic news released quarterly, and some monthly, are central banks' interest rate decisions and their meetings. Always, before the release of this type of data and economic news, price spreads excessively increase.

-Trading at the Opening and Closing of the Week: At the start of the weekly trading and market openings, markets usually experience a lack of liquidity and an increase in price spreads. As we approach the market closings, markets also often experience some exiting by traders and a rise in price spreads.

Ideas that help to determine the Best Time to Trade for the Lowest Price Spreads:

Choose the Best Time to Trade: Always aim to trade during the European and American sessions and between the overlap of these sessions.

Select a Reliable Broker: Trading starts with choosing a trusted broker. Aim to choose a globally licensed broker that also offers low price spreads.

Follow the Economic Calendar: Avoid trading just before the release of economic data and news.

Conclusion: 

Low price spreads play a key role in a trader's journey as they directly impact their results. By focusing on the best trading sessions, choosing a reliable broker, and avoiding trading before news releases, costs can be reduced and the chances of making profits can be increased.