Spreads are: the price difference that affects traders' profits

Spreads are the difference between the bid price and the ask price of a financial instrument, such as currencies, stocks, or commodities. To succeed in trading, investors need to understand how spreads work and their impact on trading costs and profits.

In forex trading, every trader must see the Bid (sell price) and Ask (buy price) on the platform screen. For example, on the Mitrade platform, these two numbers are never the same. The gap between them is called the spread.

Bid and Ask: Basic Understanding

Forex trading has unique characteristics. The Bid (sell) price is always lower than the Ask (buy) price. For example, if you want to buy EUR/USD, you pay the Ask price of 1.05680. If you want to sell EUR/USD, you only get 1.05672. If you buy and immediately close the position, you will incur a loss of 0.8 pips, which is a profit for the broker.

This difference is not just a mathematical figure; it is a hidden cost in every trading transaction. Most brokers earn directly from the spread, calculated in pips, which is a standard unit in the forex market.

How to Indicate Market Liquidity

The size of the spread tells us about the market’s liquidity. When the forex market is normal, spreads are around 0.001%. This small number indicates a high number of buyers and sellers, making trading smooth.

However, if spreads widen to 1% or 2%, it signals danger. It shows that market liquidity has decreased significantly, with fewer buyers and sellers, increasing the risk of unfavorable prices.

Fixed Spread: Advantages and Disadvantages

A fixed spread is a predetermined difference set by the broker. Regardless of market conditions, this spread remains constant.

Advantages: Traders can precisely calculate costs because they know exactly what the spread is. This provides confidence for those planning strict trading strategies.

Disadvantages: A major drawback is requotes. During high volatility, brokers need to adjust spreads quickly. They will send a message asking you to accept a new price before continuing. Usually, this new price is worse than the original. During volatile times (like NFP news releases), requotes happen frequently, causing many trading plans to fail.

Variable Spread: Market Flexibility

A variable or floating spread is the difference between Bid and Ask that changes according to market conditions. Brokers pass on real market prices (through liquidity layers) without interference.

Under normal conditions, spreads might be just 1-2 pips. During major news events (such as U.S. unemployment data), spreads can spike to over 20 pips. Everything depends on market demand.

Advantages: Skilled and fast traders benefit because costs are often lower than fixed spreads, especially in high liquidity conditions. Also, there are no requotes because prices change according to the real market.

Disadvantages: Not suitable for scalpers, as rapid changes make it hard to profit. Additionally, for beginners, when spreads widen, expected profits can disappear in an instant.

Which to Choose: Fixed or Variable?

There is no universal answer. Each has pros and cons depending on your strategy and experience.

Retail traders who prefer small trades often benefit from fixed spreads because costs are predictable. Large traders who trade frequently and in large volumes, especially during high market activity, may find variable spreads more advantageous.

If you trade “fast and frequent” (scalping/day trading) and want to avoid requotes, choose variable spreads. For confidence and precise calculations, fixed spreads are better.

Futures recommend choosing brokers with stable spreads that do not fluctuate excessively. Stable spreads make trading easier. When selecting currency pairs, opt for popular pairs like EUR/USD and GBP/USD, which typically have lower and more stable spreads compared to exotic or emerging market currencies.

In summary, spreads are central to trading costs. A deep understanding of spreads will help you make better decisions. When you understand how spreads work and choose the type that fits your trading style, your chances of success increase. Forex trading is not gambling but a financial transaction that requires knowledge, strategy, and planning.