Spread in Trading — is the difference between the buy price of an asset (bid) and its sell price (ask) at the exact same moment in time. This difference determines the initial conditions of a trade and directly affects a trader’s profitability. The smaller the spread, the more favorable the trading conditions; the larger it is, the higher the costs when entering the market. For a trader, understanding the spread is just as important as knowing support and resistance levels.
The term spread translates from English as “range” or “gap”. In a financial context, it refers to the gap between the seller’s and buyer’s prices. Essentially, the spread is the broker’s commission, which is automatically deducted when a position is opened. That’s why every position on Forex, the stock market, or a cryptocurrency exchange starts with a small loss equal to the size of the spread. This is why traders pay special attention to choosing a broker and trading conditions.
On Forex, stock exchanges, and cryptocurrency platforms, the spread is a critical factor to consider when selecting a broker, trading strategy, and asset. This is especially relevant for scalping and intraday trading, where every pip matters, and even a slight widening of the spread can affect the outcome of a trade. For long-term investors, the spread is less critical but still impacts overall returns.
Types of Spreads on Forex
In trading, there are two main types of spreads: fixed spread and floating spread. Each has its own characteristics and is suitable for different strategies. Understanding the differences helps traders choose the best conditions and reduce costs.
Fixed Spread
- The spread size does not change regardless of market conditions.
- Convenient for beginners and automated trading systems.
- Set by the broker in advance and specified in the client agreement.
A fixed spread on Forex allows a trader to calculate potential losses and profits in advance. This makes trading more predictable and comfortable for beginners. However, during periods of high volatility, the broker may manually widen the spread, reducing its attractiveness for active traders and scalpers. Therefore, fixed spreads are more often chosen by those who value stability and transparency.
Floating Spread
- Changes depending on liquidity, demand, and the news background.
- In calm markets, it can be 1–2 pips; during news releases, it can widen to 50 pips or more.
- Preferred by experienced traders and long-term strategies.
A floating spread is more flexible and reflects real market conditions. However, it is less predictable: during high activity or major economic news, its value can sharply increase. This makes it inconvenient for trading robots and automated systems but offers more opportunities for traders who know how to work with volatility. Floating spreads are especially relevant for news trading and long-term strategies that require adaptation to current market conditions.
What Affects the Size of the Spread?
The size of the spread on Forex and other financial markets is influenced by many factors. Understanding these helps traders accurately assess trading costs and choose the best instruments. The higher the liquidity and transparency of the market, the narrower the spread. During instability, low activity, or sudden news events, the spread widens. This must be taken into account when choosing a currency pair, broker, and trading strategy.
- Asset liquidity — the higher the liquidity of a currency pair or stock, the smaller the spread. Tight spreads are typical for major pairs like EUR/USD, GBP/USD, or USD/JPY. Exotic pairs and low-liquidity stocks have wider spreads.
- Trading volume — high trading volumes narrow the spread because supply and demand are balanced. This is especially noticeable on stock exchanges and in cryptocurrency trading.
- Market volatility — during instability, news releases, or economic events, the spread widens. For example, when interest rate or inflation data is published, the spread can increase several times.
- Broker type — market makers and large banks offer minimal spreads, while dealing desks may set higher commissions. That’s why it’s important to compare Forex brokers’ spreads before starting to trade.
- Client status — VIP clients and participants in affiliate programs often receive reduced spreads, making trading more profitable.
To trade efficiently, it’s essential to consider currency pair spreads when choosing a platform. Tight spreads are the key to profitable trading, especially in scalping and frequent trades. Wide spreads increase costs and make trading less profitable, particularly for short-term strategies.
How to Profit Considering the Spread?
Profiting with the spread is possible with careful calculation of entry and exit points. For example, if the spread is 2 pips, the price must move at least 2 pips in your favor just to break even. To make a profit, the move needs to be larger. That’s why it’s crucial to factor in the spread when planning every trade, especially on Forex and in scalping.
There is also the practice of rebates — returning part of the spread to the trader. This can be a fixed amount or a percentage of turnover, credited daily, weekly, or monthly. Rebates help reduce trading costs and increase strategy efficiency, regardless of whether the trade was profitable or not. Many brokers offer rebates as part of their loyalty programs.
Advantages and Risks of the Spread
Advantages:
- Transparency and predictability of costs — the spread is always known in advance and displayed in the terminal.
- Ability to accurately calculate profitability and plan trades.
- Accessibility for all levels of traders — from beginners to professionals.
- The spread helps assess market liquidity and choose optimal instruments.
Disadvantages:
- Loss upon entry — every position starts in the red by the amount of the spread.
- Spread widening during news releases and high volatility can lead to unexpected losses.
- Difficulty in calculation with floating spreads, especially for automated systems and trading robots.
- Wide spreads reduce the effectiveness of short-term strategies like scalping.
Conclusion
The spread in trading is not just a technical term but a key element that affects every trade. It determines a trader’s starting conditions and influences the choice of strategy and broker. Understanding the spread is the foundation of competent trading on Forex, stock, and cryptocurrency markets. The better you understand what affects the spread, the more effectively you can manage your trades.
If you want to trade confidently, learn to analyze currency pair spreads, factor them into profit calculations, and choose brokers with optimal conditions. And if you’re just starting out — take trading training to understand how the market works and how to use the spread to your advantage. This will help you reduce costs and increase trading efficiency.
