Understanding Spreads in Trading: What Every Trader Should Know

What Is a Spread?

In trading, the spread is the difference between the bid price (what buyers will pay) and the ask price (what sellers will accept). It represents the cost of executing a trade and is one of the primary ways brokers make money.

When you see a currency pair quoted as EUR/USD 1.0850/1.0852, the first number (1.0850) is the bid and the second (1.0852) is the ask. The spread here is 2 pips (0.0002).

Bid and Ask Prices Explained

The Bid Price

The bid is the price at which you can sell (the price buyers are offering). When you close a long position or open a short position, you transact at the bid price.

The Ask Price

The ask (also called the offer) is the price at which you can buy (the price sellers want). When you open a long position or close a short position, you transact at the ask price.

Why the Difference?

The spread exists because:

• Market makers need compensation for providing liquidity
• Brokers need revenue to operate
• It reflects supply and demand imbalances
• It accounts for market risk and volatility

How Spreads Affect Your Trades

Starting in the Red

Every trade starts with a small loss equal to the spread:

• You buy EUR/USD at the ask (1.0852)
• Immediately, your position is valued at the bid (1.0850)
• You're instantly down 2 pips (the spread)
• Price must move 2+ pips in your favor just to break even

Impact on Profitability

The spread's impact depends on your trading style:

Trading Style	Average Trade	Spread Impact
Scalping (5-10 pips)	Many trades, small targets	Very High (20-40% of profit)
Day Trading (20-50 pips)	Several trades daily	High (4-10% of profit)
Swing Trading (100-300 pips)	Few trades weekly	Moderate (0.5-2% of profit)
Position Trading (500+ pips)	Few trades monthly	Low (<0.5% of profit)

Fixed vs. Variable Spreads

Fixed Spreads

Some brokers offer fixed spreads that stay constant regardless of market conditions:

Advantages:

• Predictable trading costs
• No surprises during volatile periods
• Easier to calculate expected costs
• Better for news trading strategies

Disadvantages:

• Often wider than variable spreads in calm markets
• Broker may requote or reject orders during volatility
• May not reflect true market conditions

Variable (Floating) Spreads

Variable spreads fluctuate based on market conditions, liquidity, and volatility:

Advantages:

• Tighter spreads during normal market conditions
• Reflects actual market liquidity
• More transparent pricing
• Often better for high-frequency trading

Disadvantages:

• Widens significantly during news and volatility
• Less predictable costs
• Can be very wide during low liquidity periods

What Causes Spreads to Widen?

Market Volatility

During high volatility events, spreads typically widen:

• Major economic releases (NFP, CPI, interest rate decisions)
• Unexpected news events
• Market crashes or rallies
• Geopolitical events

Low Liquidity Periods

Spreads widen when fewer participants are trading:

• Market open/close transitions
• Between major trading sessions
• Holidays and weekends (rollover period)
• Exotic currency pairs (less traded)

Time of Day

Spreads vary throughout the 24-hour forex trading day:

• Tightest: London-New York overlap (8am-12pm EST)
• Moderate: London or New York session alone
• Widest: Asian session, especially for non-Asian pairs

Typical Spreads by Instrument

Major Currency Pairs

The most liquid pairs have the tightest spreads:

• EUR/USD: 0.5-2 pips (most liquid pair)
• USD/JPY: 0.5-2 pips
• GBP/USD: 1-3 pips
• USD/CHF: 1-3 pips
• AUD/USD: 1-2 pips
• USD/CAD: 1-3 pips

Minor Currency Pairs

Cross pairs (no USD) have moderately wider spreads:

• EUR/GBP: 1-3 pips
• EUR/JPY: 1-3 pips
• GBP/JPY: 2-5 pips
• EUR/AUD: 2-4 pips

Exotic Currency Pairs

Pairs involving emerging market currencies have the widest spreads:

• USD/TRY: 10-50+ pips
• USD/ZAR: 50-150+ pips
• EUR/TRY: 15-60+ pips
• USD/MXN: 20-100+ pips

Other Markets

• Gold (XAU/USD): 20-50 cents ($0.20-0.50)
• Oil (crude): 3-10 cents
• Stock indices: Varies widely by index
• Cryptocurrencies: Often 0.1-1% of price

Spreads vs. Commissions

Spread-Only Accounts

Some brokers build all their compensation into the spread:

• No separate commission charges
• Simpler cost calculation
• Often marketed to beginners
• Spreads are typically wider than raw-spread accounts

Raw Spread + Commission Accounts

Other brokers offer tighter spreads but charge a separate commission:

• Spreads closer to interbank rates
• Commission charged per lot traded
• More transparent pricing
• Often lower total cost for active traders

Comparing Total Trading Cost

To compare brokers, calculate total cost per trade:

Total Cost = Spread + Commission (if any)

Example comparison for 1 standard lot EUR/USD:

• Broker A: 2 pip spread, no commission = 2 pips ($20) total
• Broker B: 0.2 pip spread + $7 commission = 0.2 pips + $7 = $9 total

In this example, Broker B is cheaper despite charging commission.

How to Minimize Spread Costs

1. Trade Liquid Pairs

Stick to major currency pairs with the tightest spreads. EUR/USD, USD/JPY, and GBP/USD typically offer the best spread conditions.

2. Trade During Peak Hours

Trade during high-liquidity periods when spreads are tightest:

• London session (3am-12pm EST)
• New York session (8am-5pm EST)
• Especially the overlap (8am-12pm EST)

3. Avoid Trading Around News

Spreads widen significantly during major economic releases. Unless you have a news-trading strategy, consider waiting until spreads normalize.

4. Choose the Right Broker

Compare brokers' typical spreads for the pairs you trade most. Consider:

• Average spreads during your trading hours
• Spread stability during volatility
• Total cost including any commissions
• Execution quality

5. Adjust Your Strategy

If spreads are eating into profits:

• Consider longer-term trades with larger profit targets
• Reduce trading frequency
• Focus on higher-probability setups
• Use limit orders for better entry prices

Spread Manipulation and Concerns

Potential Issues

Some traders report concerns about spread practices:

• Spread widening at stops: Spreads widening right as stop-losses are hit
• Inconsistent spreads: Spreads not matching advertised "typical" rates
• Spike spreads: Brief extreme widening without apparent cause

Protecting Yourself

• Use regulated brokers with good reputations
• Monitor spreads during your trading
• Keep records to identify patterns
• Consider using spread alerts if your platform offers them
• Read broker reviews and regulatory filings

Understanding Spread Costs for Different Position Sizes

Calculating Spread Cost

The monetary cost of the spread depends on your position size:

For forex (pip value × spread in pips):

• Standard lot (100,000 units): ~$10 per pip → 2 pip spread = $20
• Mini lot (10,000 units): ~$1 per pip → 2 pip spread = $2
• Micro lot (1,000 units): ~$0.10 per pip → 2 pip spread = $0.20

Annual Spread Costs

Consider how spreads add up over time:

• 5 trades per day × $20 spread = $100/day
• 20 trading days/month = $2,000/month
• 12 months = $24,000/year in spread costs alone

This example illustrates why professional traders obsess over minimizing spreads.

Conclusion

Spreads are an unavoidable cost of trading, but understanding them helps you minimize their impact on your profitability. Whether you're a scalper where every pip matters or a position trader where spreads are a minor concern, knowing how spreads work makes you a more informed trader.

Key takeaways:

• The spread is the difference between bid and ask prices
• Every trade starts with a loss equal to the spread
• Spreads impact short-term traders more than long-term traders
• Fixed spreads offer predictability; variable spreads offer tighter rates in calm markets
• Spreads widen during volatility and low liquidity
• Major pairs have tighter spreads than exotics
• Compare total trading costs (spread + commission) when choosing brokers
• Trade during liquid hours to get the best spreads

Frequently Asked Questions

Why are some currency pairs' spreads so much wider than others?

Spread width reflects liquidity and trading volume. Major pairs like EUR/USD are traded by millions of participants globally, creating tight markets. Exotic pairs have fewer participants, less volume, and higher risk for market makers, resulting in wider spreads to compensate.

Do spreads matter if I'm a long-term trader?

They matter less but still matter. If you're targeting 500 pips and the spread is 2 pips, it's only 0.4% of your profit. But if you're making many trades over time, those costs compound. Even position traders should seek competitive spreads.

Should I always choose the broker with the tightest spreads?

Not necessarily. Consider the total picture: execution quality, reliability, regulation, platform features, and customer service. A slightly wider spread from a more reliable, better-regulated broker may be worth it. Also, compare total costs including any commissions.

Why do spreads widen during news releases?

Liquidity providers reduce their exposure during uncertain times. They don't know which direction price will move, so they widen spreads to protect against being caught on the wrong side of a large move. Some may withdraw liquidity entirely, making available liquidity more expensive.

Is there a way to completely avoid spread costs?

No. Spreads are a fundamental part of how markets work. You can minimize them through broker selection, timing, and instrument choice, but you cannot eliminate them entirely. They're a cost of doing business in trading, similar to transaction fees in other industries.