Understanding the Spread in Forex Trading: Complete Guide

What is the spread in reality?

When we talk about the spread in the context of trading, we refer to the price gap that exists between the value at which you can sell an asset (bid price) and the value at which you can buy it (ask price). This differential is the basis of the business model for online brokers and represents the implicit cost you assume in each transaction you perform.

The spread varies according to multiple characteristics of the asset: its specific nature, the level of volatility present in the market, and especially the total trading volume executed on it. This concept is fundamental in derivatives such as CFDs, where floating spreads are the most common norm.

Two main categories of spreads

There are two distinct modalities in the market that you should know. Floating spreads are characterized by being dynamic and variable, constantly adjusting as market conditions and real-time economic information evolve. These spreads change based on instant demand and supply.

On the other hand, fixed spreads maintain their value consistently during the trading period, although under extreme volatility or liquidity shortages, they may experience temporary widening. Generally, when trading derivatives, you will see floating spreads, as modern technology allows intermediaries to access all market information instantly.

The charging mechanism: how spreads work

The spread is the primary method through which trading platforms earn their commissions. Unlike traditional financial institutions that apply explicit and separate rates, brokers embed their profits directly into the spread.

This structure means that when you place a buy or sell order, the cost is already included in the execution process itself. It is an implicit and non-transparent fee in its presentation, although its effect is immediate on your operational result.

How to calculate your spread step by step

The calculation is surprisingly simple. You only need to subtract the Bid price from the Ask price. Both values appear on your trading platform, and typically detailed spread information is available in each instrument’s tab.

Let’s take a practical example. If the EUR/USD pair shows a Bid price of 1.05656 and an Ask of 1.05669, the calculation would be:

1.05669 – 1.05656 = 0.00013

In the forex market, this difference is measured in pips, with a pip being the fourth decimal place. In this case, the spread would be 1.3 pips. This small differential may seem insignificant, but it is considerably amplified in larger trades.

The real impact of spreads on your results

As a cost element, spreads directly affect your final profitability. The wider the spread, the higher your entry cost, proportionally reducing the potential gains. Conversely, traders working with tight spreads enjoy more favorable margins for profitability.

Also consider that spreads are not uniform across all platforms. It is advisable to make a preliminary comparison to select competitive providers. Likewise, do not evaluate the spread in isolation but consider it within the total set of commissions each intermediary applies. Some advertise tiny spreads but compensate by charging other fees: currency conversion commissions, inactive account fees, or withdrawal charges.

Remember also that spreads naturally vary depending on the asset type. You should not limit your investment decisions solely based on the tightest spread but choose instruments that truly align with your strategy.

Factors that determine the width of the spread

Volatility: the first determinant

When a market experiences high volatility, spreads tend to widen. Conversely, assets with low standard deviation offer narrower spreads. Cryptocurrencies and stocks often show much wider spreads compared to the forex market, where fluctuations are more predictable.

Liquidity: the critical factor

Market depth plays a decisive role. Assets with high trading volume have reduced spreads, while instruments with low volume show expanded spreads.

Consider these real comparisons: a large tech stock where hundreds of millions of dollars are traded daily will have very tight spreads. In contrast, stocks with lower volume will have wider gaps. In forex, the EUR/USD pair with its enormous market depth contrasts significantly with exotic pairs like NZD/CAD.

Impact of events and news

Although inherently unpredictable, certain events can cause temporary expansions in spreads. A globally significant news event — such as a conflict between raw material producers — can dramatically increase spreads temporarily. In the forex market, political or economic crises in countries issuing key currencies can have similar effects. When Russia invaded Ukraine, spreads of pairs involving the ruble spiked notably.

Differences between forex spreads and stock spreads

While in forex we measure spreads in pips due to multiple decimals, in the stock market we use a different unit called tick, which represents the minimum variation in which a stock is quoted.

Stocks typically operate with two decimals, so one tick equals one hundredth of a currency unit. In U.S. stocks, each tick represents $0.01.

Let’s look at an example with a stock: if the Bid price is $329.61 and the Ask is $330.33:

330.33 – 329.61 = 0.72

The spread would be 72 ticks or 72 cents. It is incorrect to call this “72 pips” because a pip in stocks would be 0.0072 dollars, which does not reflect the actual differential.

Spread trading strategies: beyond CFDs

Spread trading strategies exist and can be profitable, although they are applied exclusively with financial options, not with simple CFDs. Options are contracts that give you the right — but not the obligation — to buy (call option) or sell (put option) an asset at a predetermined price on a specific date.

There are three main configurations:

Vertical Spreads: Combine options with the same expiration but different strike prices.

Horizontal Spreads: Use the same strike price but different expiration dates.

Diagonal Spreads: Vary both the price and the expiration dates.

Strategic combination of buying and selling calls and puts allows constructing risk profiles suited for bullish, bearish, or range-bound markets.

Final reflection

Spreads are inherent to any derivatives operation, regardless of whether you trade forex, stocks, or other instruments. Understanding how they work is essential to optimize your trading results. The key is to select platforms that offer competitive spreads without hiding additional costs, and to incorporate this variable into your comprehensive risk-benefit analysis of each trade.