The spread is the difference between the buy and sell prices that traders need to understand thoroughly.

The spread is the difference between the bid price and the ask price of various financial instruments, whether currencies, stocks, or cryptocurrencies. It is a fundamental concept that every trader must understand to plan their trades effectively. The spread is not just a cost affecting profit and loss but also indicates market liquidity and risk.

What is the Spread: General Definition

In financial markets, the spread refers to the difference between the price offered by the broker or liquidity provider to buy (Ask) and the price available to sell (Bid). These small differences are part of transaction costs.

For example, when you want to buy the EUR/USD currency pair on a trading platform, you might see a Bid price of 1.05672 and an Ask price of 1.05680. The difference is 0.8 pips, which is the spread. If you buy and close the position immediately, you will lose 0.8 pips. This difference becomes the broker’s income.

The Spread Indicates Market Conditions: Investment Signal

The size of the spread reflects market liquidity and risk. In normal conditions, the forex spread is usually small, around 0.001%. However, if the spread widens to 1-2%, it indicates the market is experiencing low liquidity or high volatility.

Studying the spread helps investors understand risk levels and the optimal times to enter or exit positions.

Types of Spreads: Fixed Spread vs. Variable Spread

Currently, traders encounter two main types of spreads: Fixed Spread and Variable (Floating) Spread. Each has different characteristics, advantages, and disadvantages.

Fixed Spread: Pre-Set Spread

A fixed spread is set as a constant by the broker and does not change with market conditions. This allows for precise calculation of trading costs and predictable expenses.

Advantages:

• Enables accurate profit and loss planning due to fixed costs.
• Suitable for beginner traders seeking certainty.

Disadvantages:

• Risk of Requote; the broker may reject a trade order if the market is highly volatile, requiring you to accept a new price before proceeding.
• Not ideal during volatile periods, as the offered price may not reflect actual market conditions.

Variable Spread: Floating Spread

A variable spread changes according to market demand and supply. When liquidity is high, spreads are narrow; during major news releases or quiet periods, spreads widen.

Advantages:

• No Requote risk, as spreads adjust automatically with market conditions.
• Usually cheaper than fixed spreads during high liquidity periods.
• Suitable for professional traders with quick decision-making.

Disadvantages:

• Spreads can widen suddenly, e.g., during NFP (Non-Farm Payroll) announcements, increasing costs sharply.
• Not suitable for short-term speculation due to rapid price changes.

Which Spread Type Is Right for Me: Recommendations

There is no definitive answer as to whether fixed or variable spreads are better; it depends on your trading style and strategy.

For retail traders:

• If you prefer quiet trading and trade less frequently, fixed spreads offer more certainty.

For large traders:

• If you trade often and want to avoid requotes, variable spreads may be more suitable.

Generally:

• Choose spreads that do not fluctuate excessively. Trading popular currency pairs like EUR/USD and GBP/USD usually offers narrower spreads than other pairs.

Summary: Spreads as Part of Market Mechanics

The spread is one of the key factors traders must understand deeply to develop effective investment strategies. Selecting the appropriate spread type for your trading style and choosing a broker with stable spreads can help you achieve your investment goals.

Warning: Trading in various countries involves high risks. Derivatives may lead to significant losses. Please carefully study all risk information before proceeding.