Understanding the Bid-Ask Spread: A Practical Guide for Traders

Why Does the Spread Matter for Your Operation?

Every time you open a position on a trading platform, you face a dilemma: two different prices for the same asset. This gap between the bid and ask price is not accidental — it’s how brokers charge for providing instant execution. Instead of an explicit fee deducted from your account, the cost is already embedded in these two values you see on the screen.

On one side, there is the buy price (ASK): the price at which you can buy the base currency in exchange for the quote currency. On the other, the sell price (BID): the amount you receive when selling the same base currency. The difference between them is known as the bid-ask spread — or simply, the spread.

This pricing structure makes sense from a commercial perspective. The platform buys the currency at one price and resells it to you at a higher price. When you sell, the opposite occurs: it buys from you at a lower price than it can resell in the market. These differences ensure the operator’s profit.

Two Models, Two Realities

Not all platforms operate the same way. Spreads vary depending on the adopted business model:

Fixed Spread: Predictability at a Cost

This type remains unchanged regardless of the time or market conditions. If the spread is 5 pips at 8 a.m., it will be 5 pips at noon or during nighttime volatility. Platforms acting as market makers — buying large positions from liquidity providers and reselling to retail traders — use this model. They can control the displayed prices, ensuring consistency.

The downside? During volatility spikes, the platform may offer a “requote,” asking you to accept a different price than initially seen. Additionally, slippage — when the final execution significantly diverges from the intended entry price — is a real risk.

Variable Spread: Transparency with Risk

Here, the difference is in constant movement. Platforms that do not operate as dealing desks pass the prices from multiple liquidity providers directly to the trader. Since they do not actively intermediate, they cannot control the spreads — they flow according to supply, demand, and overall market volatility.

Result: fewer requotes, greater transparency. However, during economic data releases or holidays (when liquidity dries up), spreads can widen rapidly. For scalpers — who profit from quick operations with small pips — this can wipe out the entire profit margin.

Measuring and Calculating Your Real Cost

In practice, the spread is already reflected in the quote you see. Just find the difference between the bid and ask prices. For a pair with 5 decimal places, for example, the difference between 1.04111 and 1.04103 results in 8 basis points, or 0.8 pips.

But what is the actual impact on your operation? That depends on two factors:

Transaction volume and value per pip

Suppose you are trading a mini lot (10,000 units). With a spread of 0.8 pips and a value of $1 per pip:

• 1 mini lot: 0.8 pips × 1 × $1 = $0.80
• 5 mini lots: 0.8 pips × 5 × $1 = $4.00

Increasing volume means multiplying the cost linearly. A 2-pip spread on a large contract can consume profits that seemed guaranteed in small trades.

Practical Advantages and Disadvantages

Fixed spread is better when:

• You are a beginner and prefer predictable costs
• Trading small volumes
• Seeking security regarding capital requirements

Fixed spread penalizes you when:

• Markets become volatile (requotes and slippages increase)
• You need guaranteed execution during economic news releases

Variable spread works better when:

• You are a medium/long-term trader
• Seeking maximum price transparency
• Trading during periods of high liquidity

Variable spread disadvantages when:

• You are a scalper or news trader
• The spread widens excessively during critical moments

The Takeaway for Your Strategy

Choosing a platform is not just about security or interface — it’s about understanding how the spread affects your profitability. Traders making 100 trades per month need to be much more critical of spreads than those making 10. A fixed 3-pip spread accumulated over high volume can wipe out returns that seemed solid in backtests.

Final tip: always calculate the real cost before executing your strategy. Spreads are not just numbers on the screen — they are money leaving your pocket with every transaction.