What is the spread(Spread) and why is it important in trading?

If you have just started learning about Forex trading or financial markets, you will often hear the term “spread.” But what does the actual spread mean? And why does it significantly affect your profit and loss?

The Spread(Spread) is the difference between the bid price and the ask price

Simply put, the spread is the difference between the Bid (selling price) and the Ask (buying price). Generally, when you want to buy a currency, you will buy at the Ask, which is higher. When you want to sell, you will receive the Bid, which is lower. The difference between these two prices is called the “spread.”

Imagine you want to sell gold. If you bought gold at $500 , to make a profit, you need to sell at a price higher than $500 . The difference is the spread—that’s the hidden cost of trading that the broker keeps.

The spread(Spread) appears in various markets in different forms

In Forex markets: The spread is the difference between Bid and Ask for currency pairs like EUR/USD or GBP/USD.

In stock markets: The spread is the gap between the selling and buying prices of stocks.

In digital currency markets: The spread plays the same role, being the difference between the Bid and Ask prices of digital coins.

Brokers can earn revenue from the spread because it is the trading fee that clients pay every time.

The spread indicates the health of the market

The volume of the spread is a good indicator to check the market liquidity. During normal market conditions with many buyers and sellers, the spread is usually low, around 0.001%. However, when the market is volatile and liquidity decreases, you might see the spread spike to 1-2%, indicating a lack of buyers and sellers or high risk.

Two types of spreads: choosing which changes your strategy

1. Fixed Spread( - Predictable pricing

Fixed spread is a predetermined spread that does not change regardless of market conditions. The broker sets and maintains this spread to keep it stable.

Advantages:

• You can calculate trading costs accurately because the spread remains constant.
• Facilitates effective profit and loss planning.
• Suitable for beginner traders who prefer stability.

Disadvantages:

• Requotes may occur frequently during high volatility. The broker must update prices quickly, forcing you to accept new prices or reject orders.
• Fixed spreads are often higher than average variable spreads.

) 2. Variable/Floating Spread### - Fluctuates with the market

Variable spread changes constantly, rising and falling according to supply and demand, and the actual market liquidity. Brokers do not set this spread but pass on real market prices.

Advantages:

• Usually lower spreads, especially during high liquidity periods (such as market open).
• No Requote issues because the spread naturally fluctuates with the market.
• Suitable for scalpers and experienced traders seeking lower costs.

Disadvantages:

• Spreads can widen suddenly during major news releases, such as NFP reports or large political events.
• Difficult to calculate costs precisely in advance.
• Not suitable for beginners unfamiliar with volatility.

For example, if you want to buy EUR/USD with a 2 pip spread, but suddenly a major economic announcement is released, the spread might jump to 20 pips within seconds.

Which to choose? It depends on your trading style

There is no “right” or “wrong” choice between fixed and variable spreads. It depends on:

• Small traders who prefer trading in small amounts often benefit more from fixed spreads because of price stability.

• Active traders who trade frequently, especially during market peaks, may find variable spreads more advantageous due to lower overall costs.

• Fast scalpers aiming to avoid Requotes should opt for variable spreads.

Tips to remember

• Choose popular currency pairs: EUR/USD and GBP/USD tend to have lower and more stable spreads because of high trading volume.

• Choose a good broker: Brokers with low spreads and solid infrastructure increase your chances of profit.

• Be cautious with economic data: Spreads often widen significantly during major economic announcements. Reduce risk by lowering leverage or trade size.

Summary

The spread is a fundamental concept every trader must understand thoroughly. Whether trading Forex or other assets, selecting the right type of spread for your trading style will help you achieve your financial goals. This is about planning and understanding, not luck. Therefore, study yourself systematically and choose the trading method that best suits you.