The Spread: What It Is and How It Affects Results

The spread is the difference between the buy price (ask) and the sell price (bid) of a currency pair, and for a trader it's the first, least visible cost of doing business. Every trade starts not at zero but slightly in the red by the size of the spread: to even break even, price first has to travel that gap in your direction. Ignoring the spread means systematically underestimating the real cost of trading, especially if you trade often.

Where the spread comes from

There are always two prices on the screen. If EUR/USD is quoted 1.0900 / 1.0902, the spread is 2 points. The higher an instrument's liquidity, the tighter the spread usually is, which is why majors have small spreads and exotics have wide ones. The spread is the fee you pay the market and the broker for there always being someone to sell to and someone to buy from. In essence, it's the price of instant execution: you pay it for the ability to enter and exit a position at the moment you need to.

Fixed and floating spreads

A fixed spread barely changes but is less common and usually a touch above the average floating one. A floating spread depends on market conditions: in calm hours it's minimal, but on the release of important news or in periods of low liquidity it can widen sharply, several times over. For someone who holds trades for a long time, that's a trifle. For a scalper it's a matter of the strategy's survival, because a sharp widening of the spread can turn a profitable trade into a losing one before you've even entered.

An example where the spread decides everything

A trader targets 5 to 7 points per trade, and the spread at the moment of entry is 2 points. That means almost a third of the potential profit is given away before the trade has even begun. Over a series, such "trifles" become the main reason a strategy that's profitable on paper turns out to be a loser on a live account. For a position trader with a target of hundreds of points, that same spread is almost imperceptible; the identical figure affects different styles in different ways.

The spread and choosing an instrument

From this follows a practical conclusion: the shorter your trading model, the more important a tight spread and reliable execution become. Scalping and active intraday trading require liquid pairs (majors) and good broker terms. Exotics with a wide spread suit only strategies with large targets, where the entry cost gets lost against the size of the move. When choosing an instrument, always compare the typical spread with the size of your target: if the spread eats a meaningful share of the expected move, the strategy is in doubt.

How to account for the spread in your trading

The spread needs to be built into your trading plan from the very start, not remembered after the fact. If an idea shows a profit only "before the spread," in reality it's most likely a loss. So you begin evaluating any trade not with the expected profit but with the real entry costs: the spread, the commission, and, if you hold the position, the swap. The professional approach is simple: measure the result by the real trading cost of the deal, including all costs, not by the "nice" difference in quotes on the chart. Then the spread stops being a hidden leak and becomes a clear, manageable parameter.

This material is for educational purposes and is not individual investment advice.