Understanding Bid-Ask Spread: The Hidden Cost Every Trader Needs to Know

When you’re trading forex, crypto, or stocks, there’s a silent fee eating into your profits—and most beginners don’t even realize it exists. It’s called the spread.

What Exactly Is a Spread?

The spread is simply the gap between what sellers are asking for (Ask price) and what buyers are willing to pay (Bid price). That difference? That’s your broker’s cut.

Here’s a real example: You see EUR/USD quoted at 1.05680 (Bid) / 1.05688 (Ask). If you buy and immediately sell, you lose 0.8 pips instantly—even if the market hasn’t moved. Your broker just pocketed that difference.

Think of it like buying gold for $500 and having to sell it for at least $501 just to break even. The $1 gap is the spread.

Why Does Spread Size Matter?

Spreads aren’t just random numbers—they reveal market liquidity.

• Normal forex markets? Spreads hover around 0.001%
• Volatile or illiquid markets? Spreads can spike to 1-2% or higher

Wider spreads = less money moving around = harder to exit positions at fair prices.

Two Spread Types: Which Should You Use?

Fixed Spreads

The broker locks in a specific spread regardless of market conditions.

Pros:

• Predictable costs—you know exactly what you’ll pay
• Great for planning entry/exit strategies

Cons:

• Requotes happen constantly during volatile news (market swings faster than the broker’s fixed rate can handle)
• Your pending orders get rejected and repriced worse
• Kills momentum trading

Variable (Floating) Spreads

The spread changes in real-time based on actual market supply/demand.

Pros:

• Usually cheaper during calm markets
• No requotes—orders execute as quoted
• Better for high-frequency traders

Cons:

• Can explode during breaking news (2 pips becomes 20 pips in seconds)
• Risky for scalpers and day traders
• Newbies get wrecked by sudden spike in costs

Fixed vs. Variable: Which Wins?

There’s no winner—it depends on your style:

Use Fixed Spreads if:

• You’re a small retail trader
• You hold positions longer-term
• You want predictable costs

Use Variable Spreads if:

• You trade frequently and large volumes
• You’re fast enough to trade during peak liquidity hours
• You want to avoid requotes
• You’re scalping during stable periods

The Golden Rules

1. Wider spreads = Lower profit potential. Every pip you lose to spread is a pip you don’t make
2. Major pairs (EUR/USD, GBP/USD) = Tighter spreads because more traders = more liquidity
3. Exotic pairs = Wide spreads. Unless you have a good reason, stick with majors
4. News times = Spread explosion. NFP releases, central bank announcements—spreads widen fast

The bottom line? Understanding spreads separates traders who factor in real costs from those who get blindsided by hidden fees. Choose your spread type based on your strategy, not just because it sounds cheaper.