Bid-Ask Spread
The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a financial instrument. It is one of your core trading costs and a direct reflection of market liquidity and competition.
Understanding the Two-Price System
Every quote you see on your trading platform shows two prices, not one. Understanding what those prices mean – and how the spread affects your entries and exits – is essential for any trader.
💡 You can't avoid spreads, but you can learn to work with them and choose markets and times when spreads are most favourable.
What Are the Bid and Ask Prices?
Every tradable instrument has two key prices at any moment:
Bid Price
The price at which the market (or your broker/liquidity provider) is willing to buy from you. If you hit sell, you sell at the bid.
Ask (Offer) Price
The price at which the market is willing to sell to you. If you hit buy, you buy at the ask.
The bid-ask spread is simply:
💡 The tighter (smaller) the spread, the lower your immediate cost to enter and exit a trade.
Why Does the Bid-Ask Spread Matter for Traders?
The spread is a built-in cost you pay every time you open a trade:
- When you buy, you enter at the ask and your position is immediately valued at the bid.
- When you sell, you enter at the bid and your position is valued at the ask.
This means your trade often shows a small unrealised loss right after opening – that's the spread cost. The market has to move in your favour by at least the size of the spread for you to break even.
⚠️ For active or short-term traders, spreads are one of the biggest components of total trading costs.
Example: Calculating Spread Cost on a Forex Trade
Suppose EUR/USD is quoted on your platform as:
Bid
1.1000
Ask
1.1002
The spread is 0.0002, or 2 pips.
- You buy 1 standard lot (100,000 units) at 1.1002 (ask).
- Immediately after entry, if the market hasn't moved, you could only sell at 1.1000 (bid).
- Your unrealised loss is the 2-pip spread. At $10 per pip on a standard lot, that's $20.
Key Point: The market must move at least 2 pips in your favour for you to reach breakeven, before considering any commissions or swaps.
What Affects the Size of the Bid-Ask Spread?
Several factors influence how wide or tight spreads are:
💧 Liquidity
Highly traded instruments (e.g. major FX pairs, big indices) usually have tighter spreads. Thin or exotic markets have wider spreads.
📊 Volatility
During fast or uncertain markets (news releases, shocks), spreads often widen as market makers manage risk.
🕐 Time of Day
Spreads are usually tighter during main trading sessions and wider during quiet hours or rollovers.
🏦 Broker and Account Type
ECN/RAW accounts often show very tight raw spreads plus commission, while standard accounts show wider all-in spreads.
📈 Instrument Type
CFDs on less liquid underlyings, small-cap stocks or exotic pairs typically have bigger spreads.
💡 Watching how spreads behave at different times is a simple way to understand real market conditions on your platform.
How Should You Adapt Your Trading to Spreads?
The importance of spreads depends heavily on your trading style:
Scalpers
Very sensitive to spreads because targets are small. Need the tightest spreads and best execution available.
Intraday Traders
Spreads still matter, but are a smaller percentage of expected profit per trade.
Position Traders
Spreads are a minor cost relative to larger expected moves, but still relevant when frequently adjusting positions.
In all cases, you should:
- Include spreads when planning risk-reward ratios.
- Avoid trading illiquid instruments unless your strategy expects large moves.
- Be cautious around news events where spreads can spike.
Common Misconceptions About the Bid-Ask Spread
"Spreads are just random broker fees."
Spreads reflect real market conditions (liquidity, volatility, competition) plus broker markups. They are not arbitrary, although poor brokers can abuse them.
"Zero spread means free trading."
"Zero" or very tight spreads usually come with a commission or other fees. Always look at total cost (spread + commission + swaps), not just the headline number.
"Fixed spreads are always better."
Fixed spreads can be predictable, but they are often set wide enough to cover volatility. In calm markets, variable spreads can be cheaper.
Quick Checkpoint: Do You Understand the Bid-Ask Spread?
Check if you can answer these in your own words:
- What is the difference between the bid price and the ask price?
- How does the bid-ask spread create an immediate cost when you enter a trade?
- Which factors can cause spreads to widen or tighten?
- How does your trading style change how important the spread is for you?
Tip: If you can explain these clearly, you have mastered one of the most fundamental concepts in trading costs.
Frequently Asked Questions: Bid-Ask Spread
Is a smaller spread always better?
Generally yes, because it lowers your entry and exit cost. But you should also consider factors like slippage, commissions, platform quality and regulation. A very tight spread is not useful if execution is poor.
Why do spreads spike around news events?
News increases uncertainty and volatility. Liquidity providers widen spreads and reduce quote sizes to protect themselves from sudden adverse moves, which shows up on your platform as wider spreads and more slippage.
Can different brokers show different spreads for the same pair?
Yes. Brokers use different liquidity providers, markups, account types and risk models, so spreads can vary even on the same instrument. Comparing typical spreads across brokers is part of choosing where to trade.
Does using limit orders avoid paying the spread?
If your limit order is hit (you provide liquidity), you may effectively capture part of the spread instead of paying it, especially on true ECN/market venues. On most retail platforms, however, you should still assume the spread is a key cost.
Summary: Bid-Ask Spread and Your Trading Edge
The bid-ask spread is the gap between buy and sell prices and a built-in cost on every trade. It reflects market liquidity, volatility and broker/LP pricing, and it directly impacts your breakeven point and long-term profitability.
By understanding what drives spreads and how they interact with your trading style, you can choose better instruments, trading times and account types – all of which support a more sustainable trading edge.
Next Steps: In the next lessons, you'll explore price discovery, slippage, execution speed and market depth, which build on the concept of spreads and show how orders interact with real liquidity.
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