Understanding Bid-Ask Spreads: A Trader's Essential Guide to What Does Spread Mean in Trading

Trading costs are often invisible to beginners, hidden in plain sight within the prices you see on your broker’s platform. One of the most important concepts to grasp is what does spread mean in trading—it’s the silent expense that eats into your profits. This comprehensive guide breaks down the mechanics of spreads, shows you how to calculate them, and helps you choose the right spread structure for your trading approach.

The Foundation: What Does a Spread Mean in Trading?

When you open a trading terminal to trade forex, stocks, cryptocurrencies, or other assets, you’ll notice something interesting: there are always two prices displayed for any instrument. These aren’t mistakes or glitches—they’re the foundation of how modern brokers operate.

The ask price (also called the offering price) is what you pay when you want to buy. The bid price is what you receive when you sell. The gap between these two—the spread—is how brokers earn revenue without charging you an explicit trading commission.

Think of it this way: when you buy a currency pair from your broker, they’re selling it to you at a markup. When you sell it back to them, they’re buying it at a markdown. That margin is the spread, and it represents your immediate transaction cost the moment you enter a trade.

This structure makes economic sense for brokers. Rather than billing you per trade, they embed their profit directly into the pricing. For traders, this means you’re always paying a cost to execute immediately—the cost of having your order filled right now instead of waiting.

Calculating Your Real Transaction Costs

Understanding spreads theoretically is one thing; calculating the actual cost in your account is another. Here’s what you need to know.

The spread itself is straightforward to identify: simply subtract the bid price from the ask price. For currency pairs displayed to five decimal places (common in forex), the difference is measured in pips. For example:

Scenario 1: Larger Spreads (5 Decimal Places) If EUR/USD is quoted as Bid 1.04103 / Ask 1.04111, your spread is 8 points, or 0.8 pips.

Scenario 2: Tighter Spreads (3 Decimal Places) If the same pair shows Bid 1.041 / Ask 1.042, your spread is 1 pip.

But the spread alone doesn’t tell you the dollar cost. You need two additional pieces of information: the value per pip and your position size.

Example 1: Mini Lot Calculation Trading 1 mini lot (10,000 units) with a 0.8 pip spread:

• 0.8 pips × 1 mini lot × $1 per pip = $0.80 cost

Example 2: Scaling Up Volume Trading 5 mini lots with the same 0.8 pip spread:

• 0.8 pips × 5 mini lots × $1 per pip = $4.00 cost

This scales linearly—double your position size and you double your spread cost. High-frequency traders and scalpers obsess over this calculation because even fractions of a pip multiply rapidly across numerous trades.

Two Types of Spreads: Fixed vs. Floating

The spread isn’t always the same. Brokers offer different structures, and understanding the distinction is critical for matching your broker choice to your trading style.

Fixed Spreads: Consistency Over Volatility

A fixed spread broker guarantees that the spread remains identical regardless of market conditions. Whether the market is calm or in the midst of a major economic announcement, the spread stays locked at the promised level.

This model is typically offered by market makers—brokers that operate a “dealing desk.” These brokers buy inventory from liquidity providers and resell it to retail traders. By acting as the counterparty to your trades, they control the prices shown to you, which allows them to guarantee consistent spreads.

Advantages:

• Predictable costs: You know exactly what you’ll pay before entering a trade, making budgeting simpler
• Scalping-friendly: The reliability allows rapid-fire traders to plan precise entry and exit costs
• Peace of mind: No surprise widening during volatile periods

Disadvantages:

• Higher baseline costs: Fixed spreads are often wider than floating spreads during normal conditions
• Expansion during turmoil: Even fixed-spread brokers sometimes widen spreads during extreme volatility or technical issues

Real Example: A broker guarantees EUR/USD at exactly 2 pips. This holds true during quiet Asian hours and during major US data releases—the spread never fluctuates.

Floating Spreads: Lower When Markets Cooperate

Floating spreads (also called variable spreads) shift in real-time based on supply, demand, and liquidity conditions. These are offered by non-dealing desk brokers—typically ECN (Electronic Communication Network) or STP (Straight Through Processing) brokers—that aggregate prices from multiple liquidity providers and pass them directly to traders without intermediation.

Since the broker doesn’t control these prices, they can’t fix the spread. Instead, the bid-ask gap expands or contracts based on actual market conditions.

Advantages:

• Lower costs during stable periods: When markets are liquid and calm, spreads can tighten to 0.1 pips or less
• Fair pricing: You’re seeing real market prices, not a broker’s markup
• Cost efficiency for longer timeframes: Traders holding positions for hours or days often benefit overall

Disadvantages:

• Unpredictable spikes: During economic data releases, illiquidity (holiday market closures), or crisis events, spreads can widen to 5+ pips
• Budget uncertainty: You can’t reliably predict your transaction cost before entering a trade
• Scalper risk: Rapid traders can get caught off-guard by sudden spread expansion

Real Example: EUR/USD floating spread might be 1 pip on a calm Tuesday morning, but widens to 3-4 pips when the US jobs report is released.

Choosing Your Spread Structure: Strategic Alignment

The “better” spread type depends entirely on how you trade.

For Scalpers: Fixed spreads are superior. Your strategy depends on squeezing profit from tiny price movements—often just a handful of pips per trade. A fixed 1.5 pip spread is far more manageable than a floating spread that might be 0.5 pips one second and 3 pips the next.

For Swing Traders and Position Traders: Floating spreads typically win. Your holding period is longer, so you’re not as exposed to adverse spread expansion. Meanwhile, you benefit from tighter spreads during liquid market hours. The cost advantage of 0.5 pip spreads during calm trading sessions compounds over time.

For Intermediate Traders: This is trickier. Consider how much of your trading happens during major economic events and market disruptions. If you’re primarily active during liquid hours, floating spreads may save you money. If you trade around the clock and need consistency, fixed spreads provide psychological comfort and easier risk management.

The Broker Factor

Different broker models typically correlate with spread types:

Fixed Spread Providers: Market makers and some retail brokers promise stability. These brokers have built their business on consistency and are willing to absorb volatility risk themselves.

Floating Spread Providers: ECN and STP brokers compete on technology and transparency, passing market prices directly to clients. They typically attract professional traders who value lower baseline costs and real-time pricing.

Neither model is inherently superior—they serve different trader archetypes.

Why Spreads Matter More Than You Think

Spreads directly impact your profitability in ways that accumulate invisibly. A trader executing 50 trades per month with an average 2 pip spread costs $100 in transaction expenses (at 1 mini lot per trade). Switch to a broker with 1 pip average spreads and you’ve reclaimed $50—that’s real money, and it compounds across larger position sizes.

Over a year of trading, spread management can be the difference between breakeven and a solid profit margin. It’s not glamorous, but it’s fundamental to trading economics.

Common Questions About Spreads

Do spreads change during market hours? Yes, especially for floating spreads. Fixed spreads remain constant by design. Floating spreads tighten and widen throughout the trading day based on liquidity and volatility.

How is spread width determined? Brokers using fixed spreads set them based on their risk model and desired profit margin. Brokers using floating spreads have no direct control—the spreads reflect real supply and demand from the underlying market and liquidity providers.

Can I avoid spreads entirely? No. Even brokers charging explicit commissions ($5-10 per trade) also charge spreads. It’s a fundamental cost of market access and trade execution immediacy.

Final Perspective

What does spread mean in trading? It’s your entry fee to the market—the price of getting your order executed instantly. Whether you encounter fixed or floating spreads depends on your broker, but understanding both structures equips you to choose wisely. Scalpers gravitate toward fixed spreads for predictability, while longer-term traders often benefit from the lower baseline costs of floating spreads. By calculating your spread costs accurately and selecting the right structure for your trading style, you transform what often feels like a hidden tax into a transparent, manageable expense.