What Is Spread? Understanding Its Significance in Trading

If you have ever dreamt of becoming a renowned professional in the world of finance, you must understand that knowing the basics is key to successful trading regardless of being an experienced trader or a newbie. One term you’ll definitely come across is “spread,” and it plays a crucial role in every trade you make. In this article, we’ll explore what spread is, why it matters, and how to find a low-spread broker to level up your trading potential.

The spread essentially represents the transaction cost for trading an asset and is a measure of market liquidity. Usually, the higher the liquidity of a market, the tighter the spread.

Financial service providers typically present their price quotes in the form of bid and ask prices. This configuration means the ask price of an asset is always slightly higher than the bid price. In simpler terms, the spread refers to the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. This difference represents the cost you incur for entering and exiting a trade.

In trading, we define different types of spreads. Here are two of the most popular ones:

1. Fixed Spreads

• remain constant regardless of market conditions. Typically, they’re offered by brokers using a dealing desk model, where they create their own internal market. Trading costs can be a concern for beginners, especially in unpredictable markets. And here, fixed spreads provide a sense of security and stability, making it advantageous for those who are new to trading.

2. Variable or Floating Spreads fluctuate based on market volatility. During times of high liquidity, when, for example, major market sessions overlap, spreads can be very tight. On the other hand, during off-market hours or major economic events, spreads can widen significantly. Traders preferring floating spreads generally aim to capitalize on the periods of tighter spreads.

By understanding the differences between these types of spreads, you can choose a trading platform that aligns with your trading strategies and risk tolerance.

Spread is calculated with a very simple mathematical formula. You always want to subtract the Bid Price from the Ask Price:

Spread = Ask Price – Bid Price

For example, if the ask price of EUR/USD is 1.1250 and the bid price is 1.1240, the spread would be 0.0010 (1.1250 – 1.1240).

You probably know that the spread is usually expressed in pips (percentage in points). In this case, the spread would be 10 pips (as for most currency pairs the fourth decimal place represents a pip).

We already know that the spread impacts our trades, but we still have to understand the exact mechanism behind it. To illustrate the impact of the spread on trading costs, let’s take a simple example, where we open a buy position and then immediately close it (sell), while the market remains at the same price. This example can clearly demonstrate how the spread affects the overall cost of the trade, given that both trades happen while the price is at the same level.

Trading Bitcoin:

Let’s say you analyze the current bid-ask prices for Bitcoin, set at $67,100 and $67,120. If you decide to buy and immediately sell 1 Bitcoin, you would purchase at the ask price of $67,120 and sell at the bid price of $67,100. By doing this quick buy-sell action, you would face a transaction cost known as the spread, amounting to $20 in this instance. The spread will result in a $20 loss shown in the P/L (Profit/Loss) of your trading account history.

Trading EUR/USD

You examine the current market bid-ask prices for EUR/USD, which are 1.1074 – 1.1076. You could buy the asset at the higher ask price of 1.1076 and immediately sell it at the lower bid price of 1.1074. So, in this case of buying and selling immediately, we can see the cost of facilitating the transaction is the cost of the spread – 2 pips.

So, if you buy and sell an asset instantly at the same price after the trade is closed, the outcome may result in a small loss, equal to the spread. Therefore, you better consider the spread when calculating your potential profit or loss, since the larger the spread, the higher the cost of the transaction.

Now you might be wondering, “Where can I find a low spread broker?”. Finding a platform known for competitive spreads can significantly impact your trading costs, particularly for strategies involving frequent trading, like scalping.

However, when choosing a broker, consider not only the spread but also other factors such as commission fees, trading platform, customer support, and regulatory compliance. If you’re looking for tight spreads and a powerful trading platform, FXGT.com might be your perfect match. We offer competitive spreads on a wide range of instruments, along with cutting-edge trading technology. You can find the minimum spreads for each account type on our Trading Account Types page. To check the spread for specific assets, visit our Markets section.

Here are some key factors to consider before choosing a broker:

• Broker type: CFD brokers generally offer tighter spreads compared to traditional stockbrokers. This is because CFD brokers operate in a highly competitive, leveraged market with direct access to various liquidity providers, allowing them to aggregate and offer competitive pricing.
• Account type: Some brokers offer lower spreads for higher-tier accounts, like PRO and ECN at FXGT.com. These accounts often require a larger minimum deposit but can significantly reduce your trading costs, especially if you trade frequently.
• Asset type: Spreads can vary depending on the asset you’re trading. Major currency pairs like EUR/USD typically have tighter spreads than minor currency pairs or exotic assets. This is because major currencies are more liquid and have higher trading volumes.
• Platform features: The trading platform’s features are essential for executing trades efficiently. Look for platforms that provide real-time data, robust analytical tools, and intuitive trading interfaces. At FXGT.com we offer advanced charting tools and automated trading options, enhancing the trading experience.
• Customer service: Reliable customer support is crucial, particularly for new traders who may need assistance navigating trading platforms or understanding market conditions. Responsive and knowledgeable support can make a significant difference in managing your trading operations effectively.

Understanding spreads and their impact on your trading strategy is vital for trading success, regardless of experience level. It’s the invisible toll booth you pay for entering and exiting trades. By knowing the different types of spreads and how they’re calculated, you can make informed decisions and choose a broker that aligns with your trading goals.

Here at FXGT.com, we believe in empowering traders with the knowledge and tools needed to thrive in the markets. Explore our educational resources and benefit from our advanced trading platforms – all designed to help you reach your trading goals. Open an account today and experience the difference a low-spread broker can make in your trading success!