What is the Spread and why is it important in trading

What Does Spread Mean

The spread is the difference between the selling price (Bid) and the buying price (Ask) of various assets, such as currencies, securities, or other commodities. This is a fundamental concept that appears throughout the financial industry and is applied across many markets.

In Forex trading: The spread is the difference between the Bid price (Bid) and the Ask price (Ask) of a currency pair.

In stock trading: The spread is the difference between the Bid price (Bid) and the Ask price (Ask) of that stock.

In the digital currency market: The spread is the difference between the Bid price (Bid) and the Ask price (Ask) of a cryptocurrency.

When you buy an asset and close the position immediately, you will incur a loss due to this difference. For example, if the EUR/USD Bid price is 1.05672 and the Ask price is 1.05680, the difference is 0.8 pips, which is your trading cost.

What Does the Spread Tell Us

The amount of the Bid-Ask spread (Bid-Ask Spread) is an important indicator for measuring market liquidity (Market Liquidity). Highly liquid markets, such as normal currency markets, tend to have very low spreads, around 0.001%.

However, if you see markets with spreads of 1-2%, it indicates low liquidity, often occurring during high volatility or major news releases.

There Are 2 Types of Spreads: Fixed and Variable

Fixed Spread (Fixed Spread)

A fixed spread is a predetermined value that remains constant at all times. The broker sets this rate regardless of market conditions.

Advantages:

• Allows precise calculation of trading costs
• You know exactly how much you will pay before trading

Disadvantages:

• Requotes often occur, especially during high volatility. When prices change rapidly, the broker may “block” your system and ask you to accept a new price.
• During major news events, Requotes can happen frequently, disrupting your trading plan.

Variable Spread (Variable Spread)

A variable or floating spread is a rate that constantly changes according to market conditions. Brokers pass on market prices without interference.

Example: If you want to buy EUR/USD with a 2 pip spread, but suddenly U.S. employment news is released, the spread might spike to 20 pips instantly.

Advantages:

• Experienced traders often pay lower costs, especially during high liquidity periods
• No Requote issues, as the spread adjusts with market conditions

Disadvantages:

• Not suitable for scalpers or those who need to calculate costs in advance
• Can be difficult for beginners, as spreads can widen rapidly, reducing profit expectations

Which Spread Is Better?

There is no universal answer, as it depends on your trading strategy and expertise.

Retail traders who trade small units often benefit more from fixed spreads because they can clearly calculate costs.

Large traders who trade frequently, especially during peak market times, may benefit more from variable spreads.

If you want quick trading and to avoid Requotes, choose a variable spread.

Tips for Managing Spread

1. The more the spread fluctuates, the harder it is to profit.

2. Choose popular currency pairs like EUR/USD and GBP/USD, which have high liquidity, lower spreads, and less fluctuation.

3. Avoid less popular currency pairs as they tend to have higher spreads and more volatility.

Summary

A deep understanding of the spread helps you plan effective trading strategies. Forex is not gambling but a financial transaction that requires knowledge and planning. Those who understand the trading system thoroughly are more likely to succeed than those who do not.