Spread
Last updated
Last updated
The Spread in trading refers to the difference between two prices—most commonly between the bid and ask prices of a security. It can also be used more broadly to describe the difference between prices of two assets, or two timeframes of the same asset. As a technical indicator, the spread can be plotted on a chart to analyze market volatility, liquidity, and potential trading opportunities.
Traders use the spread to understand market sentiment, detect inefficiencies, and make decisions about trade entries and exits.
We will look at how this indicator works in other markets, as well as the specific indicator built into the VOOI platform.
In its most basic form, the Spread Indicator calculates the numerical difference between:
The ask price (the lowest price a seller is willing to accept), and
The bid price (the highest price a buyer is willing to pay).
Alternatively, the spread may be calculated between:
Two different moving averages (MA spread),
Two related securities (e.g., gold vs. silver),
Two timeframes of the same asset.
For most charting platforms, the spread is calculated in real time and displayed either as a line plot or histogram to highlight periods of expansion and contraction.
Reading the Spread indicator depends on the context in which it is used:
Bid-Ask Spread:
Narrow spread: High liquidity, low volatility. Easier execution, lower cost.
Wide spread: Low liquidity, high volatility. Higher risk and cost to enter/exit positions.
Asset Spread (between two instruments):
A widening spread can signal divergence in strength or weakness between two assets.
A narrowing spread might suggest convergence or similar momentum.
Moving Average Spread:
When the difference between fast and slow moving averages increases, momentum is increasing.
A decreasing spread may signal a potential reversal or weakening trend.
Spread indicators can vary in form and function, but some useful settings include:
For Bid-Ask Spread:
Real-time data feed is essential.
Visualization over short intervals (tick, 1-minute, 5-minute) for day traders.
For Asset Spreads:
Ensure correlation between the two instruments.
Use normalization if asset prices differ greatly in scale.
This is how this indicator works on other platforms. Now let's see how it works on VOOI.
You need to select two types of assets that you will compare.
This means that you will see the correlation between your two selected assets on the chart, and you can use this data to create your strategy.
Monitor the bid-ask spread to enter trades with minimal slippage.
Avoid wide spreads during low-liquidity periods (e.g., pre-market, news events).
Calculate the spread between two correlated assets.
Enter trades based on mean-reversion strategies when the spread deviates significantly from the average.
Sudden spread expansions may signal upcoming breakouts or high-impact news.
Use spread expansion as a filter to avoid entering trades during unstable periods.
Ignoring spread size when setting stop-losses or take-profit—trades may be closed prematurely due to price gaps.
Using spread in isolation—always combine it with trend or volume indicators for confirmation.
Misinterpreting cause of spread expansion—sometimes it reflects market conditions (e.g., news), not trading opportunity.
Overlooking trading fees/slippage—especially when spreads are wide, it can lead to increased trading costs.
The Spread is a versatile concept in trading—whether you’re analyzing the bid-ask spread, the difference between moving averages, or the price gap between correlated assets. It helps reveal market structure, volatility, and liquidity conditions, which are essential for smart trading decisions.
Used properly and in conjunction with other indicators, Spread can enhance your understanding of trade timing, cost management, and market sentiment. But remember—it’s a tool, not a standalone solution.
