The spread is the difference between the bid price (what the market will buy from you at) and the ask price (what the market will sell to you at) of an instrument. It is expressed in pips or dollars and represents a direct cost of every trade — you pay it every time you cross the spread to open or exit a position. A buy order fills at the ask and exits at the bid; a sell order fills at the bid and exits at the ask. Either way, price has to move at least the spread before the trade is at zero.
Spreads can be fixed (broker guarantees a constant value, common in dealing-desk models) or variable (widens and tightens with liquidity, normal on ECN/STP brokers). They typically widen around news, the daily rollover, and weekend gaps.
Formula
Spread (pips) = Ask - Bid
Spread cost ($) = Spread in pips x pip value
Worked example
EUR/USD bid = 1.08495, ask = 1.08510. You buy 1.0 standard lot.
- Spread = 1.08510 - 1.08495 = 0.00015 = 1.5 pips
- Spread cost = 1.5 x $10 = $15
- The trade enters at 1.08510 but is marked-to-market at the bid (1.08495). Your equity shows –$15 the instant you click buy.
If you scalp 10 trades a day at this spread, that is $150/day in spread cost before any P&L — roughly $3,000 a month on a 20-day calendar.
Why it matters
Spread is the silent killer of high-frequency strategies. A system that wins 55% of trades at 1:1 R:R on the chart can become breakeven or losing once a 1.5-pip spread is paid round-trip. Always benchmark your edge net of spread, not gross.
Common pitfalls
- Backtesting on bid-only data and ignoring ask fills — overstates returns by spread x trade count.
- Trading exotic pairs or low-liquidity sessions where spreads triple silently.
- Missing the spread widening on news, which can turn a planned 10-pip stop into a 25-pip stop the moment NFP prints. See slippage.