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Understanding spreads is one of the most critical concepts in trading, whether you are investing in forex, stocks, commodities, or crypto. Many beginners underestimate the role of the spread and later realize how much it impacts profits and losses. This beginner guide to understanding spread explains what spreads are, why they matter, how to calculate them, and practical strategies to manage spread costs effectively.
What Is a Spread in Trading?
A spread refers to the difference between the bid price (the price at which you can sell) and the ask price (the price at which you can buy). It is essentially the cost of entering and exiting a trade, and it varies depending on the asset, the market’s liquidity, and the broker’s policies.
- Bid price: The highest price a buyer is willing to pay.
- Ask price: The lowest price a seller is willing to accept.
- Spread: Ask price – Bid price.
For example, if EUR/USD has a bid of 1.2000 and an ask of 1.2002, the spread is 2 pips.
Why Spreads Matter for Beginners
Beginners often focus only on price direction and ignore spread costs. However, spreads directly affect profitability. The wider the spread, the more the market must move in your favor before you can break even.
Key Reasons Spreads Matter:
- Hidden trading cost: Every trade starts with a small loss equal to the spread.
- Profitability impact: Wider spreads eat into potential profits.
- Market conditions: Spreads can widen during volatility or low liquidity.
- Broker choice: Some brokers offer tighter spreads but charge commissions, while others include fees in wider spreads.
Visual example of bid and ask prices, showing how spreads affect entry and exit points.
| Topic | Key Points | Pros | Cons | Example |
|---|---|---|---|---|
| Definition | Spread = Ask – Bid | Simple to calculate | Varies by broker, market | EUR/USD 1.2000–1.2002 → 2 pips |
| Why It Matters | Hidden cost, affects profit, widens in volatility | Helps choose brokers wisely | Beginners often ignore | Wider spread = harder to break even |
| Fixed Spreads | Constant cost, good for stable planning | Predictable, beginner-friendly | Wider, possible requotes | Market makers offering fixed pricing |
| Variable Spreads | Change with liquidity, volatility | Tighter in normal markets | Widen in news, less predictable | Spreads widen during major events |
| Commission + Raw | Ultra-tight spreads + commission fee | Transparent, good for scalpers | Extra fees, not for beginners | 0.0 pip + fixed commission |
| Calculation | Spread = Ask – Bid | Easy formula | Needs conversion (pips, cents) | Bid 1.1010, Ask 1.1013 → 3 pips |
1. Fixed Spreads
Fixed spreads remain constant regardless of market volatility. They are common with market makers who provide liquidity themselves.
Pros:
- Predictable trading costs.
- Easier for beginners to manage.
Cons:
- Often wider than variable spreads.
- Can experience requotes during high volatility.
2. Variable (Floating) Spreads
Variable spreads fluctuate with market liquidity and volatility.
Pros:
- Tighter spreads during normal market conditions.
- More reflective of actual market activity.
Cons:
- Can widen dramatically during major news events.
- Less predictable for beginners.
3. Commission-Based with Raw Spreads
Some brokers offer ultra-tight spreads (even 0.0 pips) but charge a commission per trade.
Pros:
- Transparent cost structure.
- Attractive for high-frequency traders.
Cons:
- Additional commission fees must be considered.
- Not always beginner-friendly.
How to Calculate Spreads
Spreads are usually measured in pips in forex or basis points in bonds.
Formula:
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Spread = Ask Price – Bid Price
Example:
- Bid = 1.1010
- Ask = 1.1013
- Spread = 0.0003 (3 pips)
In stock trading, spreads are measured in cents or dollars, depending on the share price.
For a deeper understanding, check out how to calculate spread in perpetual futures, where funding rates and market maker activities can make spreads more comp