Bid/Ask Spreads Explained

Every trade you place has a cost: the spread. Understanding spreads is essential to becoming a profitable trader.

What Is the Spread?

The spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair.

• Bid Price: the price at which you can sell the base currency
• Ask Price: the price at which you can buy the base currency
• Spread: Ask minus Bid

Example: If EUR/USD is quoted as 1.1050 / 1.1052, the spread is 2 pips.

Why Spreads Matter

The spread is your cost of entry. Every trade starts in a small loss equal to the spread. For you to profit, the price must move in your direction by at least the spread amount.

Tight vs Wide Spreads

Tight spreads (1-3 pips) — typical for major pairs during peak sessions Wide spreads (5-20+ pips) — typical for exotics, low liquidity periods, or news events

Factors That Affect Spreads: - Liquidity — more liquidity = tighter spreads - Volatility — high volatility = wider spreads - Time of day — spreads widen during session transitions and after-hours - News events — spreads can blow out dramatically during major releases - Broker type — ECN brokers typically offer tighter spreads than market makers

Spread and Trading Cost Calculation

For a standard 1 lot (100,000 units) trade on EUR/USD with a 2-pip spread: - Pip value for 1 lot EUR/USD = $10 - Spread cost = 2 pips x $10 = $20

That $20 is paid every time you open a trade. If you trade 10 times per day, that is $200 in daily costs — or $4,000 per month.

How to Minimize Spread Costs - Trade only during peak liquidity hours (London and New York overlap) - Focus on major pairs with the tightest spreads - Avoid trading during major news releases - Use limit orders instead of market orders when possible - Choose a broker with competitive spreads

Understanding spreads is the first step toward proper trade management. In the next lesson, we will explore the global trading sessions and when to trade.