One of the most overlooked aspects of Forex trading is the cost of opening a trade position.
At the usual cost of 2 – 4 pips, the bid-ask spread is not something that’s taken seriously by retail traders.
In fact, I would say that it’s typically ignored.
After all, it’s not something that traders can avoid… so why worry about it?
To understand this issue, let’s look at the graphical representation of the bid-ask spread on the trading chart.
View The Bid-Ask Spread In MetaTrader 4
First, right-click anywhere on the chart and click “Properties”.
In the chart properties window, select your choice of colors for the bid and ask lines.
The “Grid” color = Bid line color
The “Ask line” color = Ask line color
For illustrative purposes I’ve selected red for the bid line, and blue for the ask line.
Next, go to the “Common” tab.
Check the “Show Ask line” radio button.
Un-check the “Show grid” radio button.
Then click “OK”.
And voilà, you can now see the bid-ask lines on your trading chart.
But What’s The Point Of This?
As you’ve read in the Retail Forex Manifesto, the bid-ask spread is an operational expense. It’s the cost you pay regardless of whether you profit from the trade.
And the larger the spread is – in relation to the profit potential – the less worthwhile the trade is.
Let’s look at a chart example:
Here you can see that prices have dipped significantly, and is now consolidating.
If you’re an intraday trader or scalper, you might be looking to profit from this ranging price action.
But look what happens when we include the bid-ask spread on the chart:
As you can see, the bid-ask spread (the area between the blue and red lines) takes up most of the ranging price action.
To make a profit in such a situation, you’d not only have to correctly anticipate prices continuing to consolidate, you’d also have to click fast enough catch prices at the top and bottom of the range.
In the image below, the yellow areas are where you’d have to enter a buy/sell trade in order to make a profit… of just 1 – 2 pips.
So which time frame do you think this chart is showing?
It’s the 5 minute time frame.
Now contrast this to a similar situation on the 1 hour time frame:
Since the spread is proportionately smaller in relation to the price swings, we get a lot more opportunities for a larger potential profit of 6 – 10 pips.
This is an often overlooked detail of short-term trading, which significantly reduces its profitability and sustainability over the long run.
As mentioned in the Retail Forex Manifesto, if you’re going to be trading for a long time you’ll need to adopt a trading approach that stacks the odds in your favor.
Based on the 2 examples we’ve just seen, it’s clear which one offers more opportunities for a profit (i.e. fewer losses), and with a larger profit potential.
Don’t Sell Ice To Eskimos
Short-term trading is appealing to many traders because it promises “quick profits” and “instant wins”.
The reality of it however, is that it is a way of trading where you are most unlikely to keep winning.
In the meantime, your broker will be smiling all the way to the bank with the huge chunk of fees it has collected from you.
As with many other areas in life, it pays to choose to play the game that gives you the best chance of winning.
I Hope This Guide Has Been Helpful
Nevertheless, if anyone reading this insists on short-term trading, I hope this quick tutorial on the bid-ask spread can help them make better trading decisions.
As for me, I’ll continue trading on the longer time frames with the Icarus method.
What do you think? Let me know in the comments below!