What is Spread and why do traders need to understand it

If you have just started entering the trading world, you may have been confused by the term Spread a lot, because it appears everywhere in your trading account. But what exactly is the Spread you see, and how does it affect your profit/loss? Let’s see how important the Spread really is.

What is the Spread?

Fundamentally, Spread is the difference between the bid price (Bid Price) and the ask price (Ask Price) of any asset, whether it’s currency, stocks, or cryptocurrencies.

For example, in the Forex market, you see the EUR/USD prices as follows:

• Bid: 1.05672 (the price you can sell)
• Ask: 1.05680 (the price you can buy)

This difference is exactly 0.8 pips, which is the Spread itself.

In the case of exchanging cryptocurrencies or trading stocks, the principle is the same - the difference between the bid (Bid) and ask (Ask) prices is the hidden cost you have to pay.

What does the Spread cause?

The Spread plays two roles in trading:

• For traders: It is a cost paid every time you enter a trade. Even if you enter and exit immediately, you have already lost the Spread.
• For brokers: It is part of their revenue. Each trade generates income from this difference.

Experienced traders often compare the Spread to trading gold - if you buy gold at $500 a certain price$501 and want to sell for profit, you need to sell at least at (a higher price$500 . The difference between )the buy and sell price( is the Spread.

What does the Spread tell us about the market?

The size of the Spread is not just a cost; it is also a key indicator of market liquidity:

• Normal currency markets: Spread is about 0.001% )very small(
• Low liquidity markets: Spread can widen to 1-2% )which is very high###

Experienced traders observe the Spread to get clues about the market condition - whether it is strong or sluggish.

Which type of Spread is better for you: Fixed VS Floating

Most trading platforms offer two types of Spreads:

( Fixed Spread )Fixed Spread###

Characteristics: The broker sets a fixed Spread in advance, and this value does not change.

Advantages:

• You can calculate costs precisely because the Spread remains constant.
• Easier to plan your trades.

Disadvantages:

• “Requote” issues - during high volatility, brokers may block your trade and ask you to accept a new price, which is often worse than the original.
• Not flexible to changing market conditions.

( Variable/Floating Spread )Variable/Floating Spread(

Characteristics: The Spread varies according to market conditions and actual liquidity.

Advantages:

• No Requote problems.
• During high liquidity, the Spread is usually lower than Fixed Spread.
• Reflects the true market price.

Disadvantages:

• Spread can fluctuate rapidly, especially during major news events )such as NFP Report( - while you are considering closing a trade, the spread might jump from 2 pips to 20 pips.
• Difficult for scalpers )who seek small, quick profits.
• Can be challenging for beginners.

Fixed or Floating Spread: Which is better?

There is no single answer - it depends on your trading style:

• Retail traders who trade infrequently: Fixed Spread is preferable because it provides certainty.
• Active traders who trade often: Variable Spread can save costs.
• Speculators seeking speed: Variable Spread avoids Requote issues.

Tips to reduce the impact of Spread

1. Choose popular currency pairs: EUR/USD and GBP/USD have lower Spreads than less traded pairs.
2. Trade during high liquidity periods: Spreads are narrower during major market open/close times.
3. Avoid major news releases: During economic reports, spreads can widen significantly.
4. Select brokers with the most consistent Spreads: Not necessarily the lowest, but stable.

Although the Spread may seem like a small component of trading, it actually has a significant impact on your final results. The more you understand about the Spread, the better you can design strategies to reduce costs, increasing your chances of success in trading.