Understand How Spreads Affect Your Trading Costs

Why Traders Need to Master the Concept of Spreads?

When you open a position with any forex broker, you notice that there are always two prices displayed simultaneously: one to buy and another to sell. This gap between these two values is exactly what we call the spread – and it exists because brokers need to make money somehow. Instead of charging a separate and obvious fee, the cost is embedded in this price difference. For traders, understanding spreads is essential because they directly impact the final return of each trade.

The Two Sides of the Coin: Understanding ASK and BID

The ASK price (buy/order price) is the price at which you can buy the base currency. The BID price (sell/offer price) is the amount you receive when selling. The broker profits by selling to you at a higher price than they paid, and buying from you at a lower price than they can resell. This structure ensures a revenue flow for the broker without the need for explicit commission charges.

When you trade a currency pair, what you see on the screen already accounts for this price difference. Simply subtract the BID from the ASK to find the spread in points (pips).

Two Models, Two Completely Different Experiences

Fixed Spreads: Predictability in Exchange for Flexibility

In brokers that adopt fixed spreads, the difference between buy and sell remains identical regardless of market fluctuations or time of day. This model is typical of market makers (market makers) who act as counterparties to your trades. They buy large volumes from liquidity providers and pass them on to retail traders.

The advantage is predictability: you know exactly how much your trade will cost. The problem arises during periods of extreme volatility – the broker may offer a different (requote) price or cause slippage, where you enter at one price but execution occurs at another quite different.

Variable Spreads: Transparency with Unpredictability

Brokers operating without a dealing desk model offer variable spreads. They pass prices directly from multiple liquidity providers, without intermediaries. The result? The spread fluctuates constantly according to supply, demand, and market volatility.

This approach offers more transparency and fewer requotes, but it’s not ideal for scalpers, as wide spreads can quickly eat into small profits. During releases of economic data or global events, when liquidity dries up, these spreads can explode.

Calculating the Real Impact on Your Trades

To know the exact cost you are paying, two elements are critical: the value per pip and the volume you are trading.

Imagine a quote where the ASK is at 1.04111 and the BID at 1.04103. The spread is 8 pips or 0.8 pips base.

If you trade a mini lot (10,000 units) with a pip value of USD 1:

• Cost = 0.8 pips × 1 mini lot × $1 = USD 0.80

If you increase to 5 mini lots (50,000 units):

• Cost = 0.8 pips × 5 mini lots × $1 = USD 4.00

The larger your position size, the greater the impact of the spread on the final result. That’s why choosing the right type of spread for your trading style is as important as choosing your entry point wisely.