Understanding the Spread: The True Cost of Your Operation

Why Does Spread Matter to Traders?

When you open a trade at a broker, do you notice there are two different prices for the same currency? This difference is the spread, and it functions as the invisible commission that every trader pays. Unlike explicit fees, the spread is already embedded in the price you see on the screen. This is how “no commission” brokers make their money.

In practice, it works like this: the broker buys the currency at a lower price and sells it to you at a higher price. Then, it buys from you at less than what it will receive when reselling. This margin is exactly the spread.

The Two Sides of the Coin: Bid and Ask Price

Every quote you see has two faces:

Ask Price (ASK): The amount at which you can BUY the base currency. This is always the higher price.

Bid Price (BID): The amount at which you can SELL the base currency. This is always the lower price.

The difference between these two prices is also called the “bid-ask spread.” This gap exists to compensate the broker for providing immediate liquidity in your trades. Without it, you’d have to wait for a buyer or seller willing to negotiate at the exact price you want.

How to Measure Your Spread in Practice

The spread is already calculated in the quotes you observe. Your task is simply to subtract the bid price from the ask price.

Imagine a quote displayed with 5 decimal places: if the ask price is 1.04111 and the bid price is 1.04103, the spread is 8 points or 0.8 pips.

For pairs with 3 decimal places, the calculation follows the same logic, just with fewer digits.

Two Spread Models: Fixed or Variable?

Fixed Spread

The spread remains constant regardless of the time or market conditions. If your broker offers a fixed spread of 2 pips, it will always be 2 pips, whether at 8 in the morning or during economic data releases.

Advantages:

• Predictable costs for planning trades
• Usually lower capital requirements
• Makes it easier to calculate exact profit and loss

Disadvantages:

• Re-quotes: during volatility spikes, the broker may refuse to execute your order at the offered price, requesting confirmation of a new price
• Slippage: prices move so quickly that you enter a trade at a completely different price than planned

Variable Spread

The spread constantly changes according to supply and demand in the market. Brokers using this model obtain prices from multiple liquidity providers and pass them directly, without their own intermediation.

Advantages:

• Less likely to re-quote
• Greater transparency, as it reflects the real market
• You see the actual prices of global liquidity

Disadvantages:

• Bad for scalpers: widened spreads can wipe out small profits in seconds
• News traders suffer a lot: when major economic data is released, the spread can spike, turning a profitable trade into a loss

Calculating the True Cost of Your Trade

Knowing only the spread in pips is not enough. To know exactly how much you will spend, you need two additional numbers:

1. Value per pip
2. Volume or number of lots

Practical Example

Suppose you are trading with a quote where the spread is 0.8 pips and you are trading 1 mini lot (10,000 units):

Cost = 0.8 pips × 1 mini lot × $1 (value per pip) = USD $0.80

If you increase to 5 mini lots:

Cost = 0.8 pips × 5 mini lots × $1 (value per pip) = USD $4.00

The rule is simple: the larger the volume, the greater the impact of the spread on your total transaction cost. That’s why professional traders always calculate the spread before deciding the size of their position.

How Spread Affects Your Final Result

The spread is a detail that may seem small, but over hundreds of trades, it accumulates. Understanding how it works, recognizing whether your broker offers fixed or variable spreads, and knowing how to calculate its impact before entering a trade are essential skills for any trader serious about profitability.