One of the first factors to consider when evaluating various spread betting providers is the cost of the spread. What exactly is a spread and how can it affect your trading on a daily basis? Here we will look at how to ensure your trading profitability is not negatively affected by high spread costs.
The spread is the difference between the bid and the offer price. This can be seen as the price you have to pay your spread betting provider to get access to the markets and be able to place trades (either to buy or to sell an asset). The spread represents your cost of trading but not all providers will charge the same fees for the same trade.
One factor to consider is the efficiency of order execution. There have been well-documented cases of spread betting providers that have offered incredibly low spreads to their clients, but were later found to be inefficient in terms of order execution. What does this really mean?
Say a trader places an order to buy an asset at the price of $100 but the order only gets filled when the price reaches $101. This is significant because the difference of one dollar represents an unfavourable trading level for a buying position. In this example, the trader will have $1 less profit as the asset was purchased at a more expensive price. Order execution is therefore extremely important as it can negatively affect an otherwise attractive trading opportunity.
Traders must learn to strike a balance between order execution, efficiency, reliability and overall spread costs. It is easy to find out what your trading costs will be for each position before any buy or sell order is actually executed, and this is far from a negligible factor. Spreads can have a massive impact on your ability to achieve consistent long-term profits as a trader.
Make sure to take all these factors into consideration in order to avoid paying unnecessary fees or sacrificing trade efficiency and profitability. Keep in mind that spreads are a critical aspect of trading the financial markets and make sure that you assess the overall performance when comparing spread betting providers.