The spread in trading: a fundamental concept and its impact on your trades

What is the spread in trading and why is it critical to understand

The spread represents the fundamental difference between the bid price (Bid) and the ask price (Ask) in any market operation. It is one of the most important concepts that every trader must master, as it directly impacts the profitability of each position you open.

Unlike explicit commissions charged by traditional banks, online brokers use spreads as an implicit remuneration mechanism. When you execute an order, the cost of the platform’s services is already incorporated into that price difference. Understanding how it works is not optional but a necessity for anyone who wants to trade forex or CFDs with discernment.

Types of spreads you will find in the market

In your activity as a trader, you will encounter two different modalities:

Floating spreads: these vary continuously according to market conditions. They adjust to volatility, liquidity, and trading volume at any given moment. The advantage is that they reflect the market reality in real time, allowing platforms to offer the best conditions available at each instant.

Fixed spreads: maintain the same price gap constantly, regardless of market fluctuations. However, during periods of extreme volatility or lack of liquidity, these fixed spreads can widen significantly, thus losing their apparent stability.

Most modern platforms use floating spreads, especially when trading CFDs, because current technology allows knowing all market variables instantly and adjusting fees optimally.

How to calculate the spread: the most basic operation

The calculation is straightforward and does not require complex formulas. Simply subtract the bid price from the ask price, and you will get the spread.

To illustrate with a practical forex example: if you observe that the EUR/USD pair quotes with a Bid of 1.05656 and an Ask of 1.05669, then:

1.05669 – 1.05656 = 0.00013

In terms of pips (the minimum unit in forex that equals four decimals), this spread would be 1.3 pips.

When trading stocks or other assets where movements are measured in larger units, we use the term “tick” instead of pip. For example, if a stock quotes with a Bid of 329.61 USD and an Ask of 330.33 USD:

330.33 – 329.61 = 0.72

This spread would be 72 ticks or 72 cents.

Direct impact of spreads on your profitability

The spread acts as an implicit cost that directly reduces your potential gains. The larger this gap, the less profit you extract from each successful trade. Conversely, accessing tighter spreads can substantially improve your final results.

Several key aspects to keep in mind:

• A high spread requires the market to move more in your favor before you start generating real profits
• Different platforms apply different spreads for the same assets, so prior comparison is essential
• Some brokers promote low spreads but compensate with hidden fees for deposits, withdrawals, currency conversions, or account maintenance
• The spread should not be evaluated in isolation but as part of the total cost structure

Factors that determine the width of spreads

Spreads are not fixed or arbitrary. Multiple market variables influence their width:

Asset volatility: the more volatile an instrument, the wider its spread. Cryptocurrencies and small-cap stocks present broad gaps precisely because of their extreme fluctuations. In contrast, the traditional money market, where movements are more predictable, offers tighter spreads.

Available liquidity: when an asset has significant market depth and high volumes, spreads contract. A pair like EUR/USD, constantly traded for trillions of dollars, will have much tighter spreads than an exotic pair like NZD/CAD. Similarly, stocks of large corporations with millions in daily volume will show narrower spreads than small companies.

Impact events or news: when surprising relevant events occur (geopolitical conflicts, economic crises, military invasions), spreads spike temporarily. Historically, when Russia invaded Ukraine, spreads of pairs including the ruble increased dramatically due to uncertainty.

Forex spreads versus stock market spreads

The nature of each market determines how we measure spreads. In forex, we use pips because prices are quoted with up to four decimals. In stocks, where prices are expressed in whole units or two decimals, the relevant term is “tick.”

This distinction is important to correctly interpret the actual cost you assume. A spread that seems small in absolute numbers can be significant in relative terms, depending on the market.

Specific strategies with spreads: financial options

Although for simple CFD trading the spread is just a cost to minimize, in financial options trading there are strategies that deliberately exploit price differences.

Spread strategies in options are classified as:

Vertical spreads: buy and sell (call or put options) that share the same expiration date but have different strike prices. This reduces the initial cost of the strategy while limiting potential gains.

Horizontal spreads: options have the same strike price but different expiration dates, allowing to capitalize on changes in implied volatility.

Diagonal spreads: vary both the strike price and expiration, combining benefits of both previous strategies.

These techniques only work with financial options, not with regular CFDs, because they leverage the temporal structure and strike price differences that options possess.

Optimization: choosing the right approach to minimize costs

There is no single answer about what spread is “acceptable,” as it depends on your trading style. A long-term trader can tolerate wider spreads because their time horizon is longer, while a (short-term operator) or scalper needs very tight spreads to be profitable.

What matters is to evaluate comprehensively: not only look for the platform with the lowest spread but one that combines competitive spreads with solid regulation, functional trading tools, responsive customer service, and a transparent fee structure without surprises.

Some platforms operate with more innovative business models that allow them to significantly reduce spreads without sacrificing quality. Research each broker directly to understand exactly what you will pay, avoiding misleading promotions that hide commissions behind other names.

Conclusion: the spread as a fundamental variable of profitability

The spread in trading is not a minor detail but a fundamental variable that conditions your success. Mastering its calculation, understanding what determines it, and carefully evaluating what different platforms charge will put you in a position to make informed decisions.

The difference between trading with tight versus wide spreads can mean the distinction between positive returns and accumulated losses over time. That’s why dedicating time to understand “what is the spread in trading” and how it affects your operations is one of the most valuable lessons for any serious trader.