Understand the Spread: The Invisible Fee That Affects Your Profits

2026-01-04 13:53:15

The Reality Behind the Two Prices

When you open a trading platform in the exchange market, you face a fundamental question: why are there always two simultaneous prices for the same currency pair? This phenomenon is closely related to the concept of spread, a critical element that determines your actual operational costs.

In the foreign exchange market, brokers present:

Bid Price (BID): the price at which you can SELL your currencies in exchange for others offered by the broker

Ask Price (ASK): the price at which you can BUY currencies in exchange for those you deliver to the broker

The gap between these two quotes is precisely the spread, also called the “bid-ask spread.” It is the mechanism through which financial institutions that do not charge explicit commissions earn their revenue. Instead of deducting a separate fee per transaction, the broker incorporates this cost into the difference between the offered prices. From an institutional perspective, this makes sense: the broker sells to you at a higher price than it paid to acquire, and buys from you at a lower price than it will resell.

Two Types of Spreads Exist

Fixed Spread: Predictability with Caveats

The fixed spread remains unchanged regardless of market conditions, hours, or volatility. Brokers operating as “market makers” (market creators) often use this model, acquiring large volumes from liquidity providers and passing them on to retail investors.

Advantages of this model include lower initial capital requirements and predictable transaction costs. However, it has significant disadvantages: during periods of sharp oscillation, the broker may not keep up with price changes and may perform “requoting,” requesting your acceptance of a different price. Additionally, “slippage” occurs when prices move too quickly, and the final execution price diverges substantially from the initially intended quote.

Variable Spread: Real Market Adaptability

Unlike the previous model, variable spreads flow constantly. Non-proprietary brokers obtain their prices directly from multiple liquidity providers, passing them on without interference from a dealing desk. In this scenario, the broker does not control the spread; it expands or contracts according to supply, demand, and overall volatility dynamics.

Wide spreads tend to occur during significant economic releases, holiday periods, and global events that reduce liquidity. The main advantage: fewer requotes and greater transparency in pricing. The disadvantage: scalpers (small and frequent gains) and traders seeking to profit from news are disproportionately impacted, as the spread can increase so drastically that profitable opportunities become unprofitable.

Spread Calculation Methodology

Measuring the spread is simple: identify the numerical difference between the bid and ask prices. For currencies with five decimal places, if the ASK is 1.04111 and the BID is 1.04103, the spread equals 8 “points” or 0.8 “pips.”

However, calculating the actual impact on your account requires additional information: the pip value and the traded volume.

Practical Application:

Trading 1 mini lot (10,000 units), where each pip is worth US$ 1:

Spread of 0.8 pips × 1 mini lot × $1/pip = US$ 0.80 cost

Scaling up to 5 mini lots (50,000 units):

Spread of 0.8 pips × 5 mini lots × $1/pip = US$ 4.00 cost

The larger the volume or position size, the greater the absolute cost incurred. This calculation shows why choosing the right broker and understanding the spread are essential to preserving profit margins.

Strategic Implications of the Spread

Choosing between fixed and variable spreads is not just technical but strategic. Scalpers face hostile environments with wide variable spreads. News traders encounter similar challenges. Conversely, those with longer-term horizons adapt better to the inherent volatility of variable spreads, compensated by greater transparency and fewer requotes.

Understanding this dynamic transforms the spread from an invisible variable into a conscious factor in your trading strategy.

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