The success in forex trading and all other forms of trading depends on the understanding of costs, because every pip counts in this fast-paced world. It is one of the most critical but often overlooked factors: the spread, the difference between the bid price (the price at which buyers are willing to buy) and the ask price (the price at which sellers are willing to sell) of an asset. As of April 2025, with global markets still reeling from the recent market volatility, spreads are still a hot topic for traders who are looking to improve their strategies. Whether you are trading currencies, stocks or commodities, spreads are the amount that directly affects your profitability since they are the fees that you pay to enter and exit the market. This article will explain what spreads are, how they work and why they are more important than you may have realised.
At its core, a spread is the cost of doing business in any market. Picture buying a car: The dealership sells it for $20,000, but they may only have to pay $19,500 to get it; that is the $500 difference is their profit, like a spread. In trading, brokers or market makers act as intermediaries in trades and make money from the price difference. For example, in the EUR/USD currency pair, a broker may offer a bid price of 1.0800 and an ask price of 1.0802. That 2-pip spread is what you have to pay to trade, before the market has even moved. They can be tight in highly liquid markets such as major forex pairs, or wide in less traded assets such as small-cap stocks or exotic currencies.
Spread is the behaviour of the market conditions. For instance, in midweek sessions in 2025, when the U.S. Federal Reserve announced that there would be no changes to the interest rates, the spreads on the S&P 500 futures were very low, just a few points, due to high liquidity and low risk. But, say, there is a shock, for example, the 7% drop in the JSE All Share Index in March 2025 after a political scandal and a spread blowout. Volatility spikes demand, and market makers increase the spread to hedge their risk, meaning that traders pay more to execute. The data from early 2025 also shows that during a global risk-off event, gold spreads increased from 20 cents to over $1 per ounce, which is a clear indication of how external factors affect your profit/loss.
This only applies to the type of trading you are doing, therefore. Scalpers, who make their living off small price movements in a matter of minutes, die and live with spreads. A 1-pip spread on GBP/USD would take away 50% of a 2-pip profit target, so low-cost brokers are a must. Swing traders, who hold positions for days or weeks, don’t care about a few pips since their gains are 50 or 100. But even they feel the pinch in high-spread environments—consider the South African rand, emerging market currencies with spreads of 50 pips during illiquid hours. In 2024, a survey of retail traders found 62% underestimated spread costs, losing 10-15% of potential profits annually as a result.
The model used by a broker also determines the spreads. Market makers provide fixed spreads, for example, 2 pips on EUR/USD, regardless of the conditions, which is good for predictability, but sometimes at a higher cost. ECN (Electronic Communication Network) brokers, on the other hand, will connect you directly to the interbank market and offer you raw spreads as low as 0.1 pips, with a commission added. In April 2025, top ECN brokers reported an average of 0.3 pips on the EUR/USD pair during London hours, compared to 1.8 pips from fixed spread providers. Your decision will be based on strategy: Day traders prefer ECNS for tighter costs, while beginners may like fixed spreads for their simplicity.
Spreads are not only a profit killer but also a psychological killer. A large spread can delay the time it takes to break even, leading you to either exit too early or overtrade to make up for the costs. Picture: You buy Bitcoin at $60,000, but the ask is $60,100. The market must climb $100 just to hit zero—a mental hurdle that fuels impulsive decisions. The 2024 studies also revealed that traders with high spreads on majors were 30% more likely to deviate from their plans, which led to increased losses. Tight spreads, meanwhile, boost confidence, letting you focus on price action over transaction costs.
What strategies exist to reduce the impact of spreads on trading? Trading during peak liquidity periods, which span between London and New York sessions (8 AM to 12 PM EST), produces the narrowest spreads for major currency pairs. The Nasdaq 100 E-mini futures represent a high-volume asset that maintains spreads below 0.5 points throughout 2025. Choose your brokers by comparing their actual spread prices for specific instruments instead of focusing on minimum advertised rates. The calculation of spreads should influence your risk versus reward calculations. Your reward target of 3:1 will rapidly decrease when a 2-pip spread absorbs a significant portion of your capital upfront. The spreads function as discreet decision-makers that affect all your trading choices. Although spreads lack the glamour of chart patterns and news catalysts, they represent the financial reality that appears on your trading statement. When you understand spreads, you will trade more effectively without additional effort since understanding costs represents half the struggle in trading, where margins remain thin. Spreads function as the deciding factor which determines how you view both your profits and losses during trading activities.
Disclaimer!
Trading forex and other financial instruments carries a high level of risk and may not be suitable for all investors. Past performance is not indicative of future results. Before trading, consider your risk tolerance and consult a financial advisor if necessary
