Spread in the financial market: Impact on trading profits

Spread is a fundamental concept that traders must understand deeply because it directly impacts trading costs and profit potential. Whether trading forex, stocks, or other assets.

What is Spread and Where Does the Profit Come From?

The origin of the term “spread” comes from its basic meaning—the difference (the margin) between the selling price (Bid Price) and the buying price (Ask Price) in the financial markets.

For example, when looking at EUR/USD on the trading screen, you might see:

• Bid Price (: 1.05672
• Ask Price ): 1.05680

The difference of 0.8 pip is the spread of this currency pair. If a trader buys and closes the position immediately, they will incur a loss of 0.8 pip, while the broker earns a profit from this spread.

In the stock market, the spread is the same concept—the difference between the price the seller wants to receive and the price the buyer is willing to pay. This is the cost that market makers (market maker) take as their share.

Spread as an Indicator of Market Health

The width of the spread is not fixed; it varies with market conditions:

Normal Market: Narrow spread, about 0.001% — major forex markets usually have tight spreads due to high liquidity.

Crisis Market: Wide spread — when risk increases, spreads can widen to 1-2% or more. This indicates that the market is “waking up” and liquidity is decreasing.

Types of Spread: Fixed vs. Variable

The calculation system for spreads has two types, each with different movement characteristics:

( Fixed Spread )

Brokers set a fixed value regardless of market conditions.

Advantages:

• Precise cost calculation; we know exactly how much to pay.
• Predictability allows for better strategic planning.

Disadvantages:

• Frequent Requotes — during high volatility, brokers may block trading and ask traders to accept new prices ###often worse than the original price(.
• Major issue for quick scalpers — because the market moves rapidly, plans can be disrupted by Requotes.

) Variable/Floating Spread (

The spread changes according to real market conditions. Brokers pass on prices from supply and demand without interference.

Advantages:

• No Requotes — variable spreads do not require re-approval.
• Lower costs during high liquidity periods — experienced traders working during peak hours )peak hours### benefit more.

Disadvantages:

• Fluctuations beyond expectations — during major news events (such as NFP reports), spreads can jump from 2 pips to 20 pips instantly.
• Not suitable for scalping — rapid changes make profit-taking difficult.
• Price “shocks” — novice traders may distort their plans when seeing sudden large price changes.

Which is Better: It Depends on Your Trading Style

For small retail traders with low trading volume: Fixed spreads may be safer because costs are predictable.

For large traders operating consistently: Variable spreads may offer more benefits during high liquidity, especially when trading large volumes.

For stock spreads: The same structure applies — popular stocks with high trading volume tend to have narrower spreads than less traded stocks.

Strategies to Reduce Spread Costs

1. Choose major pairs like EUR/USD, GBP/USD — these have the lowest spreads due to high trading volume.
2. Be cautious around NFP, Fed meetings — spreads widen significantly during these times; avoid trading during these periods.
3. Trade during peak hours — during major market openings (London/US hours), spreads are usually narrower.
4. Carefully select your broker — compare average spreads across multiple platforms before trading.
5. Avoid exotic pairs — spreads on less common currency pairs or stocks can be 10 times wider.

Summary

Spread is not just a number on your screen; it reflects your trading costs and the health of the market. Successful traders are those who understand that spread is just one part of the trading equation and choose the type of spread that aligns with their strategy and personality.

Trading forex and other assets is not gambling; it is a financial transaction that requires understanding, planning, and proper cost calculation. Knowledge of spread is the first step toward effective trading.