Understanding a Spread and How Does It Affect Your Profitability

Every time you open a trade, you start at a small disadvantage — the spread. The spread is the built-in transaction cost of trading, and while each individual spread may seem tiny, it accumulates significantly over many trades.

The spread is the difference between the Bid price (the price at which you can sell) and the Ask price (the price at which you can buy). Example: EUR/USD is quoted as Bid: 1.08490 / Ask: 1.08510. The spread is 2 pips. If you buy EUR/USD, you buy at Ask (1.08510). If you immediately sell, you sell at Bid (1.08490). Your starting position is already –2 pips. EUR/USD must rise 2 pips just for you to break even.

Fixed vs. Variable Spreads

Fixed Spreads: Remain constant regardless of market conditions. Predictable for planning, but tend to be slightly wider than variable spreads during normal conditions.

Variable (Floating) Spreads: Change based on market liquidity and volatility. During high-liquidity sessions (London/New York overlap), variable spreads on major pairs can be as tight as 0.1–0.5 pips. During news releases or in thin markets, variable spreads can widen dramatically — sometimes 10–50 pips or more.

Spread Cost Per Trade

Spread cost per trade: For 1 standard lot of EUR/USD with a 2-pip spread, cost = 2 pips x $10/pip = $20 per round trip. If you make 10 trades per day, the daily spread cost alone is $200. Over 20 trading days, that is $4,000 — regardless of whether you win or lose. For active traders, minimising the spread is directly equivalent to improving profitability.

Key Takeaway: The spread is your unavoidable transaction cost on every trade. Choose instruments with tight spreads, trade during peak liquidity hours, and factor the spread into your break-even calculation for every trade you place.