The spread is an important piece of information that every trader must know

When trading cryptocurrencies, Forex, or other assets, one factor that significantly impacts your trading costs is the spread, which is the difference between the bid price (Bid) and the ask price (Ask). A deep understanding of spreads can help you plan your trading strategies effectively and avoid unnecessary losses.

What Is a Spread and Why Is It Important?

The spread refers to the price gap between the bid price (Bid) and the ask price (Ask) of a currency pair or other assets. This spread appears in all types of trading, whether Forex, stocks, cryptocurrencies, or commodities.

The importance of knowing the spread:

• The spread is the trading cost, which traders pay every time they open a position.
• This difference is the broker’s revenue, serving as a primary way to earn from providing services.
• The spread indicates market liquidity, with highly traded markets having narrower spreads.

For example, if you want to buy the EUR/USD pair with an ask price (Ask) of 1.05680 and a bid price (Bid) of 1.05672, the difference is 0.8 pips (pip is a unit of small price movement). This means that if you buy and close the position immediately without any price movement, you will incur a loss of 0.8 pips instantly.

What Does the Spread Tell Us About Market Conditions?

The size of the spread is a key indicator for assessing market liquidity:

High liquidity markets, such as EUR/USD during normal hours, typically have spreads as low as 0.001%, meaning there are many buyers and sellers.

Low liquidity markets show spreads widening to 1-2% or more, signaling fewer traders and higher trading risks.

Which Spread Type Is Best: Fixed vs. Variable

When choosing a trading account, you must select between two types of spreads, each with its own advantages and disadvantages:

Fixed Spread (

Characteristics: The spread is fixed and does not change. The broker sets the spread level themselves.

Advantages:

• Precise cost calculation since the spread is constant.
• Suitable for beginner traders seeking low risk.
• Easier to plan trades.

Disadvantages:

• Frequent “Requotes” )The broker rejects the price and offers a new one( during high volatility.
• The new price offered is often worse than the original, requiring quick decision-making.
• Usually, the normal spread is higher than that of floating spreads.

) Variable/Floating Spread ###

Characteristics: The spread varies according to market conditions. The broker passes the real market prices directly.

Advantages:

• No Requote issues, as prices change with actual market conditions.
• During high liquidity periods, spreads can be lower than fixed spreads.
• Ideal for active traders aiming for lower overall costs.

Disadvantages:

• Rapid price fluctuations, especially when major news releases occur (e.g., NFP reports), can cause spreads to widen from 2 pips to 20 pips within seconds.
• Not suitable for beginners unfamiliar with spread volatility.
• Difficult to predict exact costs.

Which Type Should You Choose?

There is no one-size-fits-all answer; it depends on your trading style:

Choose fixed spreads if you:

• Are a beginner trader seeking certainty.
• Trade small sizes and want to avoid high volatility.
• Need to calculate costs precisely in advance.

Choose floating spreads if you:

• Are an experienced and confident trader.
• Trade frequently and want lower overall costs.
• Want to avoid Requote issues.
• Trade during high liquidity periods.

Tips for Trading with the Right Spread

1. Select a broker with stable spreads; less fluctuation makes cost calculation easier.
2. Trade popular currency pairs like EUR/USD, GBP/USD, USD/JPY, which have high liquidity and typically lower spreads.
3. Avoid trading during highly volatile periods, such as major news releases, when spreads tend to widen significantly.
4. Compare spreads across different brokers; small differences in spreads can lead to substantial long-term profit variations.

Summary

The spread is the amount you pay each time you open a trade. Understanding the characteristics and operation of both fixed and floating spreads helps you choose the most suitable trading strategy and reduce unnecessary costs. Trading is not gambling but an investment; understanding details like spreads can help you succeed more effectively. The key is to select a spread type that aligns with your trading style.