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Every trader encounters the concept of spread. It is one of the most fundamental yet often overlooked elements in financial markets. Understanding spread is important because it directly affects the cost of every trade you make, from forex and commodities to indices and CFDs.
In simple terms, the spread represents the difference between the buying price and the selling price of a financial instrument. This gap is how brokers and liquidity providers are compensated for facilitating trades. While it may appear small, especially in liquid markets, the spread can significantly influence your trading performance over time.
In this article, we’ll explore what spread really means, the different types of spreads you may encounter, how spreads behave across various markets, and how to factor them into your trading decisions.
In trading, the spread is the difference between the bid price and the ask price of an asset. The bid price is the highest price a buyer is willing to pay for an instrument, while the ask price is the lowest price a seller is willing to accept. The spread, therefore, represents a transaction cost to the trader and a source of revenue for the broker or market maker.
Let’s consider a simple example. Suppose the EUR/USD currency pair shows:
The spread here is 2 pips, which is the difference between the ask and bid prices. If you enter a buy trade at 1.1052 and immediately close it at the bid price of 1.1050, you incur a 2-pip cost. This cost must be recovered through favorable price movement for your trade to become profitable.
Spreads influence your entry and exit points. Narrow spreads are preferable, especially for short-term strategies such as scalping or day trading, where trade frequency is high and cost efficiency is crucial. Wider spreads may be acceptable for long-term positions but still require attention, particularly during low liquidity periods or high-volatility events.
Knowing the details behind spreads allows traders to set realistic stop-loss levels and estimate transaction costs in advance.
When you trade in the financial markets, the spread is one of the most important costs to be aware of. But not all spreads are the same. Brokers offer different spread models depending on how their platforms are structured and how they connect to the market. In general, spreads fall into two main categories: fixed and variable. There are also different pricing structures such as commission-based accounts, which change how spreads affect your overall cost.
A fixed spread stays the same, regardless of what’s happening in the market. It doesn't matter if it's a quiet afternoon or a volatile news release, the difference between the bid and ask prices will not change as long as the broker holds it steady. This can give traders peace of mind, especially when they want to know exactly how much a trade will cost before entering.
Fixed spreads are most often used by brokers that operate as market makers. These brokers essentially create the market for their clients, meaning they take the other side of the trade rather than connecting you directly to external liquidity providers.
The advantage of fixed spreads is predictability. If you’re trading during times when markets are calm, you will not see a benefit in terms of lower costs compared to floating spreads, but if markets get volatile, fixed spreads will not widen the way variable spreads might. However, keep in mind that fixed spreads are typically set slightly wider to cover the risk of sudden market movements. And in some rare cases of extreme volatility, brokers may still widen them temporarily.
A variable spread, also called a floating spread, changes depending on real-time market conditions. During times of high liquidity, such as the overlap of major trading sessions, variable spreads can get extremely tight. But when the market becomes less active or when a big news event causes uncertainty, these spreads may widen significantly.
This type of spread is usually found with brokers that use straight-through processing (STP) or electronic communication networks (ECN), meaning they pass trades directly to the interbank market or other liquidity providers. In return, these brokers don’t fix the spread but allow it to adjust naturally based on supply and demand.
The benefit of a floating spread is that it can offer lower trading costs in stable markets. For traders who trade major currency pairs or metals during peak sessions, floating spreads can be very tight. On the downside, they may jump sharply during events like central bank announcements or unexpected geopolitical headlines. This can make it harder to predict costs, and in some cases, it can affect the execution of stop-loss or pending orders.
Aside from fixed and variable spreads, there’s another distinction in how brokers charge for trading: spread-only pricing versus commission-based accounts.
In a spread-only account, the broker builds all trading fees into the spread itself. What you see on your platform is what you pay. There are no extra charges per trade. This model is common among standard accounts and is often preferred by beginners due to its simplicity.
On the other hand, commission-based accounts separate the spread from the trading fee. These accounts usually offer extremely tight spreads, sometimes as low as 0.0 pips, but apply a fixed commission per lot traded. While this model is often used by professional or high-volume traders. Traders who want complete transparency about what they're paying and why may also find it appealing.
Spreads are not in the same form across all financial instruments. Each market has its own level of liquidity, volatility, and trading behavior, which influences how tight or wide the spread can be. Understanding how spreads behave in different asset classes can help you choose the right markets for your strategy and avoid unnecessary costs.
The forex market is where spreads are most commonly discussed. It’s the largest and most liquid market in the world, which typically means tighter spreads, especially in major currency pairs like EUR/USD or USD/JPY. These pairs are traded in massive volumes every day, so brokers can offer spreads as low as 0.1 or 0.2 pips in optimal conditions.
However, spreads aren’t always this tight. Minor currency pairs, like AUD/NZD or CAD/CHF, tend to have slightly wider spreads due to lower trading volume. Exotic pairs, which involve less-traded currencies such as the Turkish lira or South African rand, can have significantly wider spreads. These pairs are more sensitive to political risk and may experience sudden spread increases during news events or low-volume periods.
In commodity markets, spread behavior varies depending on the instrument. Gold and silver are among the most traded commodities and typically offer relatively tight spreads, particularly on major platforms. Gold (XAU/USD) often features a low spread because it is a popular safe-haven asset and sees consistent global demand.
Oil (WTI or Brent), on the other hand, can have wider and more fluctuating spreads. This is because oil prices are affected by a wide range of geopolitical and economic factors, including OPEC decisions, U.S. inventory reports, and global supply disruptions. During periods of volatility, spreads can widen significantly, especially if trading volumes are lower than usual.
When trading major indices like the S&P 500, DAX, or FTSE 100, spreads tend to stay reasonably tight during market hours. These instruments are widely followed and traded, which helps maintain competitive pricing. However, spreads may widen outside of regular stock exchange hours or during economic announcements.
Individual stock CFDs often have wider spreads than indices. This is because the liquidity of single stocks varies greatly. Highly traded stocks like Apple or Tesla might have tighter spreads, while less popular shares can carry higher costs due to thinner order books.
If your broker offers trading in other markets like bonds or cryptocurrencies, expect more variability in spreads. For example, cryptocurrencies are extremely volatile and trade 24/7, so their spreads tend to widen during periods of uncertainty or extreme price swings. Similarly, instruments with lower daily volume or limited market depth can be more expensive to trade.
Spreads can change throughout the trading day depending on a variety of factors. Knowing what causes spreads to widen or tighten can help you plan your trades more effectively and avoid unnecessary costs. Here are the factors that can influence:
Volatility is one of the most significant factors affecting spreads. Spreads tend to widen during periods of high uncertainty, such as major economic announcements, geopolitical developments, or financial crises. This happens because market makers and liquidity providers become cautious and adjust their prices to protect against risk.
For example, during an unexpected interest rate decision or a surprise inflation report, even major pairs like EUR/USD may experience a sharp increase in spread.
Liquidity refers to how easily an asset can be bought or sold without affecting its price. Highly liquid markets, like major forex pairs or gold, usually have tight spreads due to the large number of participants and high trading volume. When liquidity is low, spreads widen as there are fewer buyers and sellers in the market.
Low liquidity typically occurs during off-hours or around holidays when trading activity slows down. Exotic currency pairs, minor stock CFDs, and certain commodities are also naturally less liquid, which contributes to their higher spreads.
The time of day plays a major role in determining spread levels. Spreads are usually lowest during the overlap of the London and New York sessions when the forex market is most active. During the Asian session, liquidity can drop, especially in pairs not involving the Japanese yen, leading to wider spreads.
This pattern applies across other markets as well. For example, commodities like oil or indices like the S&P 500 tend to have tighter spreads when their respective exchanges are open and active.
Scheduled economic data releases, such as non-farm payrolls, GDP figures, or central bank meetings, can cause sharp spread fluctuations. Even if a trader doesn’t plan to trade the news directly, spreads may widen just before and after the release as brokers prepare for fast market movements.
Traders should always check the economic calendar and be aware of potential high-impact events before entering a position, particularly in volatile markets.
Your broker's business model can also affect spreads. Market makers often offer fixed spreads, which stay the same under normal conditions. ECN or STP brokers provide variable spreads that reflect real market prices. While these spreads are often tighter, they can widen more suddenly during news events or low liquidity periods.
In Contract for Difference (CFD) trading, the spread plays a central role in determining your trading cost. Since most CFD brokers do not charge a direct commission on standard accounts, the spread becomes the main fee that traders pay to enter and exit a position.
When you open a CFD trade, you’re simultaneously buying and selling a contract based on the price movement of an asset. You enter the trade at the ask price and close it at the bid price (or vice versa, depending on direction). This gap between the two prices is the spread, and it represents the cost you must overcome for your trade to become profitable.
For example, if you open a buy trade on gold with a 3-point spread, the price must rise by at least 3 points before you can break even. Everything beyond that is potential profit.
Most CFD trades involve leverage, allowing you to control a larger position with a smaller amount of capital. While this increases your exposure, it also amplifies the impact of spread on your account. A tight spread becomes even more important when leverage is in play, as even small differences in pricing can lead to noticeable changes in profit or loss.
It’s also worth noting that the spread affects both long and short positions equally. Whether you’re buying or selling, you’ll encounter the same bid-ask gap and need to account for that cost in your strategy.
CFDs are available on a wide range of instruments, including forex pairs, indices, commodities, and stocks. Each of these has different average spread levels:
Understanding what spread is and how it works is only the beginning. Successful trading also involves monitoring spread behavior in real time and managing its impact on your trades. Even experienced traders can lose money if they ignore how spreads shift across different market conditions.
Always check the spread before placing a trade. On most trading platforms, including MetaTrader 5 offered by ZitaPlus, the current spread can be viewed directly in the Market Watch window or on the chart. This helps you assess the immediate cost of entering a trade and whether it fits your strategy.
If you’re trading during times of low liquidity, such as early in the trading week or around major holidays, be cautious. Spreads can widen unexpectedly and increase your break-even point.
Choosing a broker with consistently low spreads is one of the best ways to reduce your trading costs. At ZitaPlus, traders benefit from tight spreads across a wide range of instruments, including forex, commodities, and indices. This is especially important for short-term strategies like scalping or day trading, where even small differences in cost can impact performance over time.
Some brokers also offer different account types for specific trading styles. If you trade frequently or with high volume, it may be worth considering a commission-based account with lower raw spreads, even if it includes a fixed fee per trade.
News releases and economic data can cause spreads to spike suddenly. Avoid opening trades right before high-impact events unless you are specifically trading the news and are prepared for sudden price movement and potential slippage.
Keep an eye on the economic calendar, and plan your entries around stable market periods where spreads are more predictable.
When planning your trades, always keep the spread in your mind. If you set your stop-loss or take-profit levels too close to the current price without accounting for the spread, your trade might be closed prematurely. This is especially important for short-term strategies where price movements are small.
Spreads are one of the most fundamental yet often overlooked components of trading. They have a direct effect on your costs and possible profits whether you trade forex, commodities, or CFDs. By understanding how spreads work, the different types available, and how they behave across various markets, you put yourself in a better position to trade wisely.
Monitoring spreads, choosing the right trading times, and using a reliable broker like ZitaPlus can help you minimize unnecessary costs and stay focused on your strategy.
What is slippage and how is it different from spread?
Slippage occurs when a trade is executed at a different price than expected, often due to market volatility or low liquidity. While the spread is the difference between the bid and ask prices, slippage refers to the difference between the expected entry (or exit) price and the actual executed price.
Are tighter spreads always better for trading?
Not necessarily. While tight spreads lower trading costs, they can also come with higher commissions in some account types. It's important to evaluate the total cost of trading, including spreads, commissions, and execution quality, to determine what's best for your strategy.
Why do spreads widen during news events?
During economic news releases or geopolitical developments, uncertainty and volatility rise sharply. Liquidity providers respond by widening spreads to manage risk. This helps protect them from rapid price changes when order books thin out.
How does leverage affect trading costs related to spreads?
Leverage magnifies your exposure to price movements, including those caused by spreads. A small spread might seem insignificant, but with high leverage, even minor differences can significantly impact your gains or losses.
Do spreads vary between trading platforms or brokers?
Yes. Different brokers offer different liquidity sources, pricing models, and account structures. This means the same asset may have different spreads on different platforms. Traders should compare brokers carefully and test spreads during active trading hours using demo accounts if needed.
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