Spread: The price difference that helps traders make better buy/sell decisions

Understanding the (Spread) is crucial for all traders, whether beginners or experienced, because the spread directly impacts trading costs and profitability. Knowing how to manage the spread and choose the appropriate type is fundamental to an effective trading strategy.

What is the Spread: The Difference Between Bid and Ask Prices

The (Spread) refers to the difference between the (Bid Price) and the (Ask Price) of a financial asset, whether it’s currency pairs, securities, commodities, or cryptocurrencies. This value is measured in units called pips (percentage in point).

For example, if the EUR/USD currency pair has a bid price of 1.05680 and an ask price of 1.05672, the spread is 0.8 pips. If a trader buys and closes immediately, they will lose 0.8 pips. This is the cost paid to execute the trade.

What does the spread tell us?

The size of the spread reflects the (liquidity) of the market. Under normal conditions, a highly liquid Forex market will have a very low spread, around 0.001%. However, if you see a spread widening to 1-2%, it indicates low liquidity and potentially higher risk.

Two Types of Spreads: Fixed vs. Variable

Traders will encounter two main types of spreads on trading platforms, each with different characteristics and pros and cons.

Fixed Spread (Fixed Spread)

A fixed spread is predetermined and does not change regardless of market conditions. The broker sets this value and charges it as a fee for trading.

Advantages:

• Traders can accurately calculate costs and plan ahead
• Suitable for beginners seeking stability in their trading plan
• Easier risk management

Disadvantages:

• Requote phenomena often occur, especially in volatile markets, where the broker “closes” and requests traders to accept new prices, which are often worse
• During major news events such as NFP releases or interest rate decisions, fixed spreads may be insufficient to accommodate market volatility

Variable/Floating Spread (Variable/Floating Spread)

A floating spread varies according to real market conditions; it moves in line with supply and demand. The broker does not set it but reflects the actual market prices.

Advantages:

• During high liquidity periods, spreads tend to be lower than fixed spreads, following market demand and supply
• No requote phenomena, as traders see real market prices
• Suitable for experienced traders who trade frequently

Disadvantages:

• During major news or low liquidity periods, spreads can widen significantly, disrupting trading plans
• Not ideal for quick speculative trading, as the spread changes rapidly
• Requires close market monitoring; otherwise, traders may miss good opportunities

Which Spread to Choose: The Key is Matching Your Trading Style

There is no universal answer as to which spread type is best, because it depends on each individual’s capabilities and strategy.

• Retail traders who prefer small trades and want stability: fixed spreads are more suitable
• Large-volume traders who trade frequently and seek lower costs in high liquidity conditions: floating spreads are a good choice
• Those wanting to avoid Requotes: floating spreads are the answer

Tips for Choosing Brokers and Currency Pairs

1. Try selecting a broker with stable spreads that do not fluctuate too much
2. Choose popular currency pairs such as EUR/USD, GBP/USD, USD/JPY, as they typically have high liquidity and low spreads
3. Avoid less frequently traded pairs, as their spreads tend to be wider

Deep understanding of spreads will help traders develop effective strategies, reduce unnecessary costs, and increase chances of success. Forex trading is not gambling but a financial transaction that requires knowledge, comprehension, and careful planning.