TRADING GLOSSARY

Spread: the hidden cost in every trade

The spread is the difference between the bid price (what buyers will pay) and the ask price (what sellers demand). Every time you enter a trade, you effectively pay the spread as a transaction cost. On a forex pair with a 2-pip spread, you start every trade 2 pips in the red.

What determines spread width

Liquidity: More liquid assets have tighter spreads. EUR/USD typically has 0.1-1 pip spreads, while exotic pairs can have 10-50 pip spreads. Volatility: During high-impact news events, spreads widen dramatically as market makers increase their risk premium. Time of day: Spreads are tightest during high-volume sessions (London/New York overlap) and widest during low-volume periods (late Asian session). Broker model: ECN/STP brokers usually offer raw spreads plus commission. Market makers offer wider spreads but no commission.

Impact on profitability

For a scalper making 50 trades per day with a 2-pip spread, the daily spread cost is 100 pips before commissions. On a standard lot, that is $1,000 per day in spread costs alone. This is why scalpers need the tightest possible spreads and why trading during the most liquid hours is essential.

For swing and position traders, spread impact is minimal relative to the size of the moves being targeted. AskTrade’s research is designed for traders who hold positions long enough that the spread is negligible.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.