Understanding Spread in Trading: The Complete Guide

What is Spread and Why Is It Important

When we talk about transaction costs in finance, Spread (Spread) is a fundamental concept that every trader should understand deeply. Spread refers to the difference between the ask price (Ask), which is the selling price of an asset, and the bid price (Bid), which is the price traders are willing to pay to buy that asset.

In the Forex market, currency pairs like EUR/USD will always have a difference between these two prices. For example, you might see a Bid at 1.05672 and an Ask at 1.05680. This difference (0.8 pip) is called the Spread.

Types of Spread: Differences and Adjustments

Traders can encounter two main types of Spread during trading hours. Each type has its characteristics and implications.

Fixed Spread: Stability in Volatile Markets

Fixed Spread (Fixed Spread) is a system where the broker sets a predetermined spread and maintains this level at all times, regardless of market changes.

Advantages of Fixed Spread:

• Predictability: You know your trading costs precisely before executing a trade.
• Planning: Small traders can calculate their profit and loss accurately.

Disadvantages of Fixed Spread:

• Requote issues: During high volatility, brokers may change prices after you accept them. The system will “lock” and force you to accept a new price, as if conditions have changed.
• Lack of flexibility: When major news like NFP (Non-Farm Payroll) is released, volatility increases, and you may experience frequent Requotes.

Variable Spread: Market Condition Adaptation

Variable Spread (Variable Spread) or Floating Spread is a system where the spread fluctuates based on real supply and demand in the market. Brokers pass through prices directly from the market.

Benefits of Variable Spread:

• No Requotes: Since prices follow market conditions, brokers do not need to adjust prices.
• Lower intra-day costs: During calm market periods, spreads are often narrower than fixed spreads.
• Suitable for quick traders: Frequent traders benefit from lower costs.

Challenges of Variable Spread:

• Uncertainty: Spreads can widen from narrow to wide, sometimes from 2 pips to 20 pips instantly when major news releases.
• Risk for beginners: Less experienced traders may miscalculate or delay decisions.

The Relationship Between Spread and Market Liquidity

The spread also tells us a lot about the market. Under normal Forex conditions, spreads are very tight, only about 0.001%. However, when liquidity drops, spreads can widen to 1-2%, indicating that buyers and sellers see the value of the asset very differently.

Choosing the Right Spread Type for Your Trading Style

There is no one-size-fits-all answer to whether to choose Fixed or Variable Spread. It depends on your trading style and strategy.

Small traders who prefer stability should opt for Fixed Spread because it allows clear planning and avoids confusion from sudden price changes.

Large traders who execute frequent trades, especially during volatile periods, should choose Variable Spread because overall costs are lower, and they can respond quickly to price movements.

Tips to Minimize Spread Risks

Regardless of whether you choose Fixed or Variable Spread, it is recommended to trade major currency pairs like EUR/USD and GBP/USD. These major pairs have higher trading volumes, resulting in more stable spreads.

Additionally, selecting highly liquid assets will help you get better spreads. Each trading system displays spread information for each asset, which you should review before trading.

Summary

Spread is a key component of trading costs, not a bonus or benefit. Understanding the differences between Fixed and Variable Spread helps you select strategies suited to your trading style. Forex trading requires careful planning, education, and strategic approaches. Traders knowledgeable about how spreads work will have an advantage over those who do not understand this mechanism.