Understanding spread is essential for anyone who trades forex or CFDs. Even though it may seem like a small detail, the spread plays a huge role in determining how much your trades cost and how profitable they can become. Every time you open a position, the spread affects your bottom line—whether you notice it or not. Knowing how spreads work will help you trade smarter, manage costs, and choose better trading opportunities.
The spread is simply the difference between the bid price and the ask price of a currency pair or asset. The bid price represents what buyers are willing to pay, while the ask price shows what sellers want to receive. Brokers quote both prices, and the small gap between them is what traders pay to open a trade. This cost is built directly into the price, so you don’t have to pay it separately—it is automatically deducted from your position the moment you enter the market.
Spreads can be tight or wide, and they vary depending on several factors. Highly liquid markets, such as major forex pairs like EUR/USD or GBP/USD, usually have tight spreads because there are many buyers and sellers at all times. On the other hand, exotic currency pairs, commodities, or volatile assets tend to have wider spreads. During financial news releases or sudden market events, spreads can widen dramatically as liquidity drops and volatility increases. Understanding when spreads are likely to widen helps traders avoid unnecessary costs.
Your broker’s pricing model also determines how the spread is calculated. Market maker brokers typically offer fixed spreads, which remain stable even during volatility. This gives traders predictable costs. ECN and STP brokers offer variable spreads that change depending on market conditions. These spreads are often extremely tight during normal trading hours but can widen during major market shifts. Traders who prefer more precise execution often choose raw or ECN accounts with tight spreads plus a small commission.
Spreads matter because they directly influence your trading costs. The moment you enter a trade, you start slightly in the negative due to the spread. This means your trade needs to move enough in your favor to cover the cost before you can see a profit. For scalpers and day traders, who rely on many small trades, spreads can significantly impact overall performance. Even a small increase in spread can make a big difference when multiplied across dozens of trades.
Choosing assets with tight spreads can improve your efficiency, especially if you trade frequently. Major forex pairs usually offer the lowest spreads, making them suitable for beginners and short-term traders. Understanding spreads also helps you decide when to trade. During quiet market hours, spreads tend to stay low, but during economic announcements, they often widen. Many traders avoid entering positions right before major news to prevent unexpected costs.
Spreads are also an important factor when comparing brokers. A broker with low spreads generally provides better value, but traders should look at the full picture: execution quality, commissions, swap fees, and overall stability. Some brokers attract traders with extremely low spreads but compensate with higher commissions. Others offer slightly higher spreads but no additional fees. Understanding how your broker charges helps you calculate real trading costs more accurately.
Managing spread costs is part of building a successful trading strategy. By choosing liquid instruments, trading during stable market hours, and selecting the right account type, you can keep your costs low and maximize potential profits. Over time, these small savings add up, especially for active traders.
Learning what spread is and how it affects your trades gives you a deeper understanding of market mechanics. It empowers you to make better decisions, choose the right broker, and approach trading with greater awareness. In the end, mastering the basics—like spreads—helps you build a stronger foundation and become a more efficient, cost-conscious trader.