Spread

The spread is the difference between the ask price and the bid price of any currency pair at a given moment, typically measured in pips. The spread is one of the most essential trading cost components that every trader must understand before entering the market.

The spread effectively represents the starting deficit for a trader's position; upon opening a buy or sell trade, the position begins at a slight loss equal to the spread, and the price must move by at least this amount before any actual profits can be realized.

The size of the spread varies from one pair to another depending on liquidity levels; major pairs with high liquidity typically feature relatively tight spreads, while exotic pairs carry significantly wider spreads due to their lower trading volume.

The spread is also influenced by prevailing market conditions; it typically widens at session opens, around major economic data releases, or during periods of low liquidity, and narrows during times of market stability and overlapping active sessions.

A common mistake is overlooking the impact of the spread on short-term trading strategies, as wide spreads can consume a significant portion of target profits in quick trades, making it essential to select appropriate trading times and currency pairs.