What Is the Spread: Explained in Simple Terms

The spread is the difference between the buy price (ask) and the sell price (bid) of a currency pair. In essence it is your first cost: any trade starts with a small loss equal to the spread, and price must first cover it in your direction to break even. Understanding the spread explains why a trade that is "in profit on the chart" can still be in the negative on the account.

Where the spread comes from

There are always two prices on the screen. If EUR/USD is quoted 1.0900 / 1.0902, the spread equals 2 pips. This is the fee to the market and the broker for the fact that at any moment there is someone to sell to and someone to buy from, essentially the price of instant execution. The higher an instrument's liquidity, the tighter the spread usually is, so majors have a small one and exotics a wide one. The spread reflects how "in demand" and liquid an instrument is.

Why a trade starts in the negative

You enter a long at the ask (1.0902), and you can close immediately only at the bid (1.0900). That means price must cover at least 2 pips in your direction just to break even. The chart is usually drawn from the bid or mid, but you entered at the ask, so starting "in the negative" is the norm, not a broker error. The spread is the first thing that "eats" part of your potential profit, even before the trade has begun.

Fixed and floating spread

A fixed spread barely changes, but it is less common and usually a bit above average. A floating spread depends on the situation: during calm hours it is minimal, but on the release of important news or in periods of low liquidity it widens sharply several times over. For long trades this is a trifle, for scalping it is a matter of survival: a sharp widening of the spread can turn a profitable trade into a losing one.

Which strategies the spread is critical for

The influence of the spread depends on style. For a scalper with a target of 5 to 7 pips, a 2-pip spread hands over almost a third of the potential profit before even entering, for them it is a key factor. For a position trader with a target of hundreds of pips, the same spread is almost imperceptible. Hence the rule: the shorter the trading model, the more important a tight spread and a liquid instrument. Exotics with a wide spread suit only strategies with large targets.

How to account for the spread

The spread must be built into the trading plan from the very start. If a strategy is profitable only "excluding the spread," in reality it is most likely in the negative. So you begin evaluating a trade with the real costs of entry, the spread, commission, and, when carrying overnight, the swap, not with the expected profit. When choosing an instrument, compare the typical spread with the size of the target: if the spread "eats" a significant share of the expected move, the strategy is questionable. The spread is an inconspicuous but constant cost: understanding where it comes from and whom it affects more turns it from a hidden leak into a manageable parameter.

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