Understanding Spreads: The Invisible Cost of Your Trades

When you open a position on any broker, you probably don’t realize you’re paying a fee — but you are. This invisible fee is called the spread, and understanding it is essential to optimize your results as a trader.

The Mechanics Behind the Spread

Every time you get a price quote on a platform, you’ll see two values simultaneously:

Buy Price (ASK): The price at which you acquire the base currency in exchange for the quote currency offered by the broker.

Sell Price (BID): The price at which the broker buys the base currency from you.

The difference between these two prices is the spread — also called the “bid-ask spread.” While brokers claim to be “commission-free,” they actually charge you through this difference. Instead of an explicit fee, the cost is embedded in the prices you see.

This is how brokers make money. When you buy, they sell to you at a slightly higher price than they paid. When you sell, they buy from you at a slightly lower price than they will resell. This margin is your spread — a fee for providing instant liquidity.

How to Measure Your Actual Cost?

Most platforms already include the spread in the displayed quote. Your job as a trader is simple: identify the difference between the buy and sell prices.

For pairs shown with 5 decimal places (EUR/USD), if the buy price is 1.04111 and the sell price is 1.04103, the spread will be 8 pips (or 0.8 points).

For pairs with 3 decimal places, the logic remains the same — just divide the difference by the number of decimal places to get the value in pips.

Two Universes: Fixed vs. Variable Spreads

There isn’t just one type of spread. Your experience will depend on the model your broker uses.

Fixed Spread: Predictability with Pitfalls

With fixed spreads, regardless of the time of day or market conditions, the difference remains always the same. If the spread is 5 pips in the morning, it will stay 5 pips during the night.

Brokers offering this — usually called “deal desk operators” — buy large volumes from liquidity providers and pass them on to retail traders. In this model, the broker acts as your counterparty, allowing them to control the displayed prices.

Advantages: Lower initial capital and predictable transaction costs, making planning easier.

Disadvantages: Requotes (when volatility is high, the broker may refuse to execute at the original price) and slippages (your final entry price can be radically different from what you expected).

Variable Spread: Flexibility and Transparency

Variable spreads change constantly according to market conditions. The difference between buy and sell fluctuates in real time.

Brokers that do not operate as “deal desks” offer this mode. They simply pass on prices from multiple liquidity providers without intervening. The broker does not control the spread — they only transmit it.

Advantages: Less chance of requotes and greater transparency about price formation.

Disadvantages: Scalpers suffer from widened spreads that quickly eat into profits. News traders are also harmed when the spread explodes during economic events.

Variable spreads tend to widen during economic releases, holidays, and periods of low global liquidity.

From Concept to Practice: Calculating Your Spread

Knowing the spread value in pips is only half the story. To calculate the actual cost in dollars, you need to know:

1. Value per pip — how much each pip is worth in your account currency
2. Trading volume — how many lots you are trading

Practical Example 1: 1 Mini Lot

Spread: 8 pips
Volume: 1 Mini Lot (10,000 units)
Value per pip: $1

Cost = 8 pips × 1 mini lot × $1 = $0.80

Practical Example 2: 5 Mini Lots

Spread: 8 pips
Volume: 5 Mini Lots (50,000 units)
Value per pip: $1

Cost = 8 pips × 5 mini lots × $1 = $4.00

The formula is linear: the larger the volume, the higher the cost associated with the spread. Always multiply the number of pips by the number of lots.

The Final Trade-Off

Your choice between fixed and variable spread depends on your trading style:

• Scalpers: Variable spread is more interesting (less requotes), but beware of sudden expansions
• Swing Traders: Both work, but consider fixed spread if you want predictability
• News Traders: Avoid variable spreads during high volatility periods

The spread is not an enemy — it’s just the cost of the game. Understanding its mechanics puts you ahead of 90% of traders who completely ignore this factor when assessing the actual profitability of their trades.