## Understanding Spread: Key Concepts for Traders

Spread (Spread) is another essential component in financial trading that many people often overlook. However, a deep understanding of it will help you develop more effective trading strategies and reduce unnecessary risks.

### What is Spread really?

At its core, Spread (Spread) is the difference between the price at which the broker is willing to buy from you (Bid/Sell Price) and the price at which they are willing to sell to you (Ask/Buy Price) for a currency, asset, or other financial instruments.

In the Forex domain, the term Spread refers to the gap between the Bid price (Bid) and the Ask price (Ask) of a currency pair. For example, if EUR/USD shows a Bid of 1.05672 and an Ask of 1.05680, it means that if you buy and close the position immediately, you will lose 0.8 pips (0.00008) instantly.

This difference occurs in all markets, whether trading stocks, Forex, or digital assets. The role of the Spread is to serve as a compensation for the broker’s income. Being able to manage the Spread correctly is a crucial skill that should not be overlooked.

### Spread Tells Us About Market Vitality

The size of the Spread is a good indicator of market liquidity. Under normal conditions, the Spread of major currency pairs (such as EUR/USD) usually remains around 0.001% or just 1-3 pips.

However, if you notice a currency pair with a suddenly widened Spread, such as spiking to 1-2%, it signals that liquidity risk in that market may be increasing. Often, a wider Spread results from important news releases or periods of high market volatility.

### Two Types of Spread: Fixed and Variable

Most trading platforms offer two ways to manage Spread:

**Fixed Spread (Fixed Spread)**

This type of Spread is predetermined by the broker and remains constant regardless of market conditions.

*Advantages:* You can accurately calculate your trading costs and predict how much you will pay since the Spread does not change. This is a clear benefit for traders who want certainty in their account management.

*Disadvantages:* Trading flexibility may be limited, especially during high volatility. Brokers might need to adjust the Spread quickly and ask you to accept a new price (Requote) when a quote is sent. Declining the quote will prevent you from completing the transaction, and accepting it often results in worse prices, which can be problematic when prices move rapidly.

**Floating Spread (Variable/Floating Spread)**

This type of Spread fluctuates constantly, depending on supply and demand in the market. Brokers pass on prices directly from the market without adjustments.

*Advantages:* Skilled and quick decision-making traders benefit from lower costs, especially during high trading volumes. Moreover, there are no Requote issues because the Spread follows market conditions.

*Disadvantages:* During major news releases, the Spread can widen rapidly, from 2 pips to 20 pips or more. For example, if you plan to buy EUR/USD with a narrow 2-pip Spread, but suddenly important news is released, and the Spread jumps to 20 pips, it can be unfavorable for short-term traders and may be costly for beginners as expenses can spike unexpectedly.

### Which Should You Choose?

The straightforward answer is: it depends on your potential and strategy.

Retail traders who trade small sizes and seek stability should opt for Fixed Spreads, as they allow precise cost calculations. Conversely, active traders, especially during high liquidity periods, may find Floating Spreads more advantageous.

The main rule is: the more volatile the Spread, the harder it is to profit. Therefore, choose a broker offering alternative management options for Spread and focus on popular currency pairs like EUR/USD and GBP/USD rather than less traded pairs, as the most traded pairs tend to have narrower spreads due to higher liquidity.

### Summary

Spread might seem like a minor detail in a trader’s life, but a thorough understanding of this aspect can save you money and help craft smarter strategies. Remember, Forex and derivatives trading are not gambling but financial transactions that require knowledge, planning, and careful risk management. Those with a solid understanding tend to achieve greater success.