The spread is the difference between the Bid and Ask prices of a trading instrument. It represents the cost of opening a position, and it’s how brokers earn on trades without charging a separate commission (in most account types).
Because of the spread, your trade will usually start with a small initial loss, which you must recover before moving into profit.
🧮 Example 1: EUR/USD Trade
Bid price: 1.0698
Ask price: 1.0700
Spread: 2 pips
You buy 1 lot of EUR/USD at the Ask price of 1.0700. The price moves in your favor by 5 pips. The new Bid/Ask is 1.0703 / 1.0705.
You close the trade at the Bid price of 1.0703, earning:
Actual gain: 3 pips
Profit: $300 (1 pip = $100 per lot for EUR/USD)
The 2-pip spread cost you $200, which is why your total profit is less than the full price move.
🧮 Example 2: GOLD/USD Trade
Bid price: $1600.50
Ask price: $1601.00
Spread: $0.50
You sell 1 lot (100 oz) of Gold at the Bid price of $1600.50. Price drops in your favor to a new Bid/Ask of $1600.00 / $1600.50.
You close the trade by buying at the Ask price of $1600.50—the same price you opened with.
Result: Despite a favorable market move, you break even because of the spread.
You needed the price to drop further to cover the spread and generate profit.
📉 Why Spreads Vary
Spreads are usually floating, meaning they can widen or narrow depending on:
Market liquidity (more liquidity = tighter spreads)
Market volatility (higher volatility = wider spreads)
This is why spreads may increase during news events or off-peak hours when fewer participants are in the market.