Spread
30-Second Definition
The difference between the Bid (sell) price and the Ask (buy) price of an asset. It represents the immediate cost of executing a trade paid to the broker.
Why It Matters
The spread is the primary way brokers make money. When you enter a trade, you do not get the exact price you see on the chart; you enter slightly worse due to the spread. This means every trade begins instantly in a negative balance (floating loss) equal to the spread cost.
Understanding the spread is critical for structural traders who place tight stop losses. If a trader places a 3-pip stop loss but the broker’s spread is 2 pips, the trader effectively only has 1 pip of breathing room before they are stopped out. Failing to account for spread when setting entries and exits is a leading cause of premature stop-outs.
Visual Explanation
Real Trading Example
You are analyzing EURUSD.
- The chart shows the current market price is 1.1050.
- The broker quotes a Bid price of 1.1049 and an Ask price of 1.1051.
The difference between the Bid and the Ask is 2 pips. This 2-pip gap is the spread.
If you click “Buy” (going long), your order is filled at the Ask price (1.1051). Because the current price you can sell at (Bid) is 1.1049, you are immediately down 2 pips the moment the trade opens. The market must move up 2 pips just for your trade to reach the breakeven point.
Common Mistakes
Common Mistake
Ignoring Spread Widening During News: Spread is rarely fixed. During major economic news releases (like NFP or CPI) or during the daily session rollover (5:00 PM EST), liquidity drops and brokers dramatically widen the spread to protect themselves. A normal 1-pip spread can instantly widen to 20 pips, easily triggering stop losses that appeared technically safe on the chart.
Professional Tips
Pro Tip
The Spread Buffer: Always add the average spread to your Stop Loss distance. If your technical analysis dictates a 10-pip stop loss, and your average spread is 1.5 pips, set a hard Stop Loss of 11.5 pips. This prevents you from being stopped out by the spread while the actual market price never touched your invalidation level.
FAQ
What is a Raw Spread account?
Many brokers offer a “Raw Spread” or “ECN” account type where the spread is reduced to nearly zero (e.g., 0.1 pips). In exchange for this ultra-tight spread, the broker charges a fixed commission (e.g., $3 per Lot) on every trade. This is generally preferred by day traders and scalpers.
Why do some prop firms have terrible spreads?
Proprietary trading firms often partner with specific liquidity providers or use their own internal pricing models for their simulated environments. Some less reputable firms intentionally widen spreads to induce slippage and cause traders to fail evaluations faster.
Can spread be negative?
In highly liquid, institutional environments with complex arbitrage happening, a negative spread is technically possible for fractions of a second, but retail brokers will never pass a negative spread to a retail trader.
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