📉 Understanding Spreads
Learn what spreads are in trading, how they work, and why they impact your profitability. Understand fixed vs. variable spreads, bid-ask prices, and how to minimize your trading costs.
Definition
The spread is the difference between the bid (sell) price and the ask (buy) price of a financial instrument.
The spread is the difference between the bid price (what buyers are willing to pay) and the ask price (what sellers are asking for) of a financial instrument — and it plays a far more important role than many beginners realize.
Whenever you open a trade, you don’t start at zero. You're already in a small loss equal to the spread — that’s the price you pay to enter the market. It’s not a hidden fee, but it’s often overlooked. Whether you’re trading forex, futures, indices, or crypto, the spread is your immediate cost of doing business. And the tighter that spread is, the faster you can move into profit.
Think of it like this: every market is a negotiation between buyers and sellers. The spread represents the gap between their expectations. Highly liquid markets like EUR/USD often have very tight spreads — sometimes just 0.1 or 0.2 pips. In contrast, exotic pairs or low-volume assets may have wider spreads, which can eat into your profit potential.
Understanding the spread helps you make better decisions — not just about when to enter or exit a trade, but also which broker you choose and which strategies you apply. For scalpers and day traders, who aim to capture small price movements, the spread is one of the most important metrics to monitor. For swing or long-term traders, it still matters — but over time, it becomes part of the broader cost structure.
In short: if you’re serious about trading, you must take spreads seriously. They influence your break-even point, your strategy, and ultimately your bottom line. The more you understand them, the more control you have over your trades — and your results.
Why Spreads Matter
- Every trade you make incurs the spread cost immediately
- Tighter spreads mean lower trading costs
- Critical for scalping and day trading strategies
- Affects your break-even point on every position
Simple Example
1Fixed Spread
Fixed spreads remain constant regardless of market volatility or liquidity conditions.
Pros
- • Predictable trading costs
- • Great for beginners planning trades
- • No surprises during news events
- • Easier to calculate exact trade costs
Cons
- • Often higher than variable spreads during quiet markets
- • Less competitive pricing
- • May include requotes during volatility
- • Limited flexibility
2Variable Spread
Variable spreads fluctuate based on market conditions, liquidity, and volatility.
Pros
- • Tighter spreads during stable market conditions
- • More competitive pricing overall
- • Reflects real market conditions
- • Better for frequent traders
Cons
- • Can widen significantly during high volatility
- • Unpredictable trading costs
- • May spike during news events
- • Requires more monitoring
Spreads directly influence your break-even point — they determine how far the market must move in your favor before a trade becomes profitable.
When you enter a trade, you don’t start at zero. You begin in a small unrealized loss equal to the spread. This means your strategy must always account for that initial gap. The tighter the spread, the faster you reach break-even — especially important for short-term trades.
If you're a scalper or day trader aiming for small, rapid moves, a large spread can eat up most of your edge. That’s why many active traders look for brokers with ultra-low spreads during peak liquidity hours.
Understanding this cost helps you adjust your entries more precisely, especially when trading around support/resistance levels or news events. Spreads aren’t just numbers — they are a key part of your risk and timing model.
Break-Even Logic
When you enter a trade, the market must move in your favor by at least the spread amount before you can break even.
Impact on Scalping
- • Scalpers need ultra-tight spreads (< 1 pip)
- • Small profit targets make spreads critical
- • High frequency = spread costs add up quickly
- • Every 0.1 pip matters for profitability
Impact on Day Trading
- • Multiple trades daily increase total spread costs
- • Need competitive spreads for consistent profits
- • 1-2 pip difference can impact monthly results
- • Consider total daily spread expenses
Bid Price
The highest price buyers are willing to pay for an asset
Ask Price
The lowest price sellers are asking for an asset
Spread
Ask Price - Bid Price = Spread
Example Price Table
| Asset | Bid Price | Ask Price | Spread |
|---|---|---|---|
| EUR/USD | 1.1000 | 1.1002 | 2 pips |
| GBP/USD | 1.3005 | 1.3009 | 4 pips |
| Gold | $1924.20 | $1925.00 | $0.80 |
| Bitcoin | $42,850 | $42,920 | $70 |
Market Volatility
- • News releases cause spreads to widen
- • Economic announcements increase uncertainty
- • Geopolitical events create volatility
- • Unexpected market moves affect liquidity
Market Liquidity
- • High liquidity = tighter spreads
- • Major pairs have better liquidity
- • Exotic pairs have wider spreads
- • More market participants = competition
Time of Day
- • London/New York overlap: Tightest spreads
- • Asian session: Moderate spreads
- • Weekend gaps: Wider spreads
- • Market close/open: Increased spreads
Broker Type
- • ECN brokers: Variable, tighter spreads
- • Market makers: Fixed, wider spreads
- • STP brokers: Variable, competitive
- • Raw spread + commission models
Spread Behavior During Different Market Conditions
Normal Conditions
EUR/USD: 0.1-1.0 pips
High Volatility
EUR/USD: 2-5 pips
News Events
EUR/USD: 5-20+ pips
| Broker | EUR/USD Spread | Gold Spread | Spread Type | Rating |
|---|---|---|---|---|
| IC Markets | 0.1 pips + $3.5 commission | $0.13 + commission | Raw + Commission | |
| XTB | 0.8 pips | $0.35 | Variable | |
| Plus500 | 1.2 pips | $0.45 | Variable | |
| eToro | 1.0 pips | $0.45 | Variable |
Note: Spreads can vary based on market conditions, account type, and trading volume. Always verify current spreads directly with brokers and test with demo accounts.
Some brokers offer ultra-low spreads but charge commissions per trade. Understanding the total cost is crucial for choosing the right pricing model.
Example: Raw Spread + Commission
Example: Spread Only
Which Is Better?
Raw Spread + Commission Better For:
- • High-frequency traders (10+ trades/day)
- • Large position sizes (> 1 standard lot)
- • Scalping strategies
- • Professional traders
Spread-Only Better For:
- • Casual traders (< 5 trades/day)
- • Smaller position sizes (< 0.5 lots)
- • Swing trading strategies
- • Beginner traders
For Scalpers
- • Need ultra-tight spreads (< 0.5 pips)
- • Consider raw spread + commission models
- • Trade during high liquidity hours
- • Focus on major currency pairs
- • Avoid trading during news
For Day Traders
- • Spreads 1-2 pips are acceptable
- • Balance spread costs with execution quality
- • Monitor spread behavior throughout day
- • Use spread alerts on trading platform
- • Consider total daily spread costs
For Swing Traders
- • Less sensitive to spread differences
- • 2-5 pip spreads are manageable
- • Focus on execution quality over spreads
- • Consider overnight holding costs more
- • Platform features matter more
General Tips for All Traders
Best Practices:
- • Use spread filters in your trading platform
- • Avoid trading during low-liquidity hours
- • Always compare total trading costs
- • Test spreads with demo accounts
- • Monitor spread behavior during different market conditions
What to Avoid:
- • Trading during major news releases
- • Entering trades with abnormally wide spreads
- • Ignoring execution quality for tight spreads
- • Trading exotic pairs without understanding spreads
- • Choosing brokers based on spreads alone
Spreads represent the invisible cost of every trade you make. While they might seem small, they can significantly impact your long-term profitability, especially for active traders.
Key Takeaways
Spreads are your immediate cost on every trade
Lower spreads can boost long-term profitability
Consider total costs, not just spread width
Test spread behavior with demo accounts
Action Steps
1. Compare Brokers
Research spreads across multiple brokers for your preferred assets
2. Test with Demos
Use demo accounts to experience real spread conditions
3. Monitor Costs
Track your spread costs and their impact on profitability
Remember
"Choose a broker with competitive, transparent pricing. The cheapest spread isn't always the best deal if execution quality suffers."
Smart trading starts with understanding your costs.
Compare Brokers with the Lowest Spreads!
Ready to start trading smarter? Compare brokers, test their spreads with demo accounts, and find the best trading conditions for your style.