Understanding Spreads in Trading: The Hidden Cost That Makes or Breaks Your Profits

Ever wonder why your entry price and exit price never match perfectly? That gap isn’t random—it’s the spread, and it’s eating into your trading profits whether you realize it or not. Whether you’re scalping cryptocurrencies, forex pairs, or any other financial instrument, understanding how spreads work is non-negotiable for managing your actual trading costs and optimizing your strategy.

The Spread: Your Broker’s Way of Making Money (And Yours Too)

When you place a trade on any platform, you’re seeing two prices at once. There’s the ASK price (the price you pay to buy) and the BID price (the price you receive when selling). The difference between these two prices? That’s the spread.

Let’s break this down with a real scenario. You’re looking at EUR/USD. The broker displays:

• Buying price (ASK): 1.04111
• Selling price (BID): 1.04103

The spread here is 0.8 pips (8 points). This isn’t a commission—it’s built directly into the price. Instead of charging you a flat fee per trade, brokers embed their profit into the buy-sell gap. This is especially common among “no-commission” brokers.

From the broker’s perspective, it’s straightforward: they buy large currency positions from liquidity providers and resell them to you at a markup. The spread is that markup. For you, it’s a transaction cost that happens instantly and automatically.

Calculating Your Actual Trading Costs

Here’s where many traders go wrong—they ignore the spread when calculating costs. But it’s real money leaving your account.

To calculate the actual cost of a trade, you need three pieces of information:

1. The spread (in pips)
2. The value per pip
3. Your trade volume (lot size)

The Formula: Spread (pips) × Value per pip × Number of lots = Total cost

Let’s work through two examples:

Scenario 1: Trading 1 Mini Lot

• Spread: 0.8 pips
• Value per pip: $1 (for a 10,000-unit mini lot)
• Cost: 0.8 × $1 × 1 = $0.80

Scenario 2: Trading 5 Mini Lots

• Spread: 0.8 pips
• Value per pip: $1 per mini lot
• Cost: 0.8 × $1 × 5 = $4.00

Notice how your costs scale with volume? If you’re running multiple positions or trading larger lot sizes, spread costs compound quickly. This is why active traders obsess over even 0.1 pip differences.

Two Types of Spreads: Fixed vs. Floating

Not all spreads work the same way. Brokers offer two main types, and choosing between them can significantly impact your bottom line.

Fixed Spreads: Predictability Over Lower Costs

With fixed spreads, the gap between bid and ask remains unchanged no matter what happens in the market. If your broker quotes a 2-pip spread on EUR/USD, it stays 2 pips whether the market is calm or chaotic.

Brokers offering fixed spreads typically operate as market makers—they take the other side of your trade rather than just passing it through. This means they control the prices you see and can guarantee consistent spreads.

Why choose fixed spreads:

• You can plan trades precisely, knowing your exact cost upfront
• Ideal for scalpers who rely on predictable, tight margins
• No nasty surprises during volatile moments

The downside:

• Fixed spreads are usually wider than floating spreads during normal conditions
• They may still widen dramatically during extreme volatility
• You’re essentially paying for guaranteed stability with higher baseline costs

Floating Spreads: Lower Costs, Higher Unpredictability

Floating spreads are the opposite—they constantly shift based on market supply, demand, and volatility. A broker might quote EUR/USD floating spreads ranging from 1 to 3 pips depending on conditions.

These spreads come from non-dealing desk brokers (ECN/STP models). They pull pricing from multiple liquidity providers and pass it directly to you without modification. Since the broker has no control over spreads, prices fluctuate in real time.

Why choose floating spreads:

• Often tighter during calm market conditions, reducing costs
• More reflective of actual market conditions
• Better for long-term traders who hold positions longer

The catch:

• Spreads widen unpredictably during economic data releases, holidays, or global events
• Costs become harder to forecast
• Aggressive traders can get caught off-guard during volatility spikes

Choosing Your Spread Type: Match It to Your Trading Style

The “better” spread depends entirely on how you trade.

If you’re a scalper: Fixed spreads win. Predictable costs mean you can calculate your break-even point precisely and execute rapid-fire trades without worrying about sudden spread expansion.

If you’re a long-term position trader: Floating spreads often come out ahead. You hold positions longer, so you avoid peak-volatility windows. The lower baseline costs compound over time and outweigh occasional spike-related widening.

The broker matters too. Market makers (fixed spread) are easy to identify, while ECN and STP brokers (floating spread) offer more transparency and alignment with actual market prices. Consider which model matches your risk tolerance and trading frequency.

The Real Impact: Why Spreads Matter More Than You Think

Let’s quantify this. Imagine you’re a day trader executing 10 trades daily:

• Using a 2-pip fixed spread costs you $20/day (10 trades × 0.8 pips × $1 × 1 lot = rough estimate)
• Over 250 trading days annually, that’s $5,000 just in spread costs

Now imagine floating spreads average 1.2 pips on normal days but spike to 4 pips during data releases. Your costs vary but might average $10-15/day—$2,500-3,750 annually. The difference between spread types isn’t trivial; it’s your profit margin.

This is why professional traders prioritize platform choice and spread comparison before committing capital.

Quick Answers to Spread Questions

Can spreads change during the trading day? Yes, absolutely—especially for floating spreads. Fixed spreads technically don’t change, but they may widen during extreme volatility. Floating spreads shift constantly based on market conditions, liquidity, and global events.

How do brokers set their spreads? Fixed-spread brokers set them based on risk models and desired profit margins. Floating-spread brokers let liquidity providers determine prices—the broker just passes them through.

Do spreads affect my entry AND exit? Yes. You pay the spread when entering (buying at ASK) and again when exiting (selling at BID). Many traders forget this double-hit when calculating profit targets.

Understanding spreads transforms how you approach trading. It’s the difference between operating blindly and trading with eyes wide open.