What is Spread? Exploring Its Definition, Influencing Factors, and Calculation Methods

The spread in Forex and CFD trading refers to the difference between the bid price (sell price) and the ask price (buy price).

The spread represents the cost traders incur when executing buy or sell transactions and is a primary source of revenue for brokers. It is influenced by several factors, including the liquidity of the trading instrument, market sentiment, and economic events.

For traders, understanding and effectively managing spreads is crucial, as they directly impact trading costs and profit potential. This article explores the concept, types, calculation methods, and factors affecting spreads in detail.

What is Spread?

Spread is the difference between the bid price (BID) and the ask price (ASK).

For example, in the EUR/USD currency pair:

Spread = 1.0903 (Ask) - 1.0902 (Bid) = 0.0001

The spread is 1 pip.

Spreads represent the trading cost paid to the broker at the time of opening a position. The size of the spread can also indicate the liquidity of a financial product. Higher liquidity generally results in smaller spreads, while lower liquidity leads to larger spreads.

Thus, the spread serves as a key measure of trading costs and indirectly reflects market conditions and the liquidity of trading instruments.

Types of Spread: Fixed Spread vs. Floating Spread

In Forex and CFD trading, spreads are categorized into two main types: fixed spreads and floating spreads.

Each type has its own advantages and disadvantages, and the choice depends on the trader's style, strategy, and risk tolerance regarding market volatility.

Fixed Spread

A fixed spread remains constant regardless of market conditions. No matter how volatile the market is, the spread stays the same.

Advantages:

• Provides stable and predictable trading costs, making cost management simpler.
• Protects traders from unexpected high costs during periods of significant market volatility.
• Suitable for traders who prioritize consistent costs and strategic planning.

Disadvantages:

• Typically higher than the average floating spread.
• The certainty in pricing comes at the expense of potentially lower spreads during stable market conditions.

Floating Spread

A floating spread, on the other hand, fluctuates based on market demand, supply, and liquidity.

Advantages:

• During high-liquidity periods with significant trading volume, floating spreads can be exceptionally low.
• Offers a cost structure that closely aligns with real-time market conditions.

Disadvantages:

• Spreads can widen significantly during market volatility, news releases, or low-liquidity periods, increasing trading costs.
• Can be less predictable for cost planning, especially during critical market events.

Comparison of Fixed and Floating Spreads

Type	Characteristics	Advantages	Disadvantages	Broker Usage
Fixed Spread	Remains constant, unaffected by market changes.	Stable trading costs; easier cost management and strategy planning.	Higher than average floating spreads; pays for price certainty.	Less common.
Floating Spread	Changes based on market demand and liquidity.	Lower costs during high liquidity; aligns closely with market conditions.	Widens significantly during high volatility, increasing costs.	More commonly used.

Floating spreads are widely preferred in dynamic trading environments due to their flexibility, while fixed spreads appeal to those who prioritize consistency in their trading costs.

Spread Payment Timing and Cost Calculation

The spread is paid immediately when a trade is opened.

Specifically, the moment you initiate a trade (whether buying or selling), the spread cost is deducted from your account as part of the transaction cost. This means your trade will start with a small loss equal to the spread cost.

Spread Cost Formula

The formula for calculating spread cost is as follows:

Spread Cost = Spread × Lot Size × Units per Lot

For example, in the EUR/USD currency pair, if the spread is 1 pip (0.0001), the spread cost varies based on the lot size.

Spread	Lot Size	Units per Lot	Spread Cost (USD)
0.0001	0.01 lots	100,000	0.1
0.0001	1 lot	100,000	10.0
0.0001	10 lots	100,000	100
0.0001	50 lots	100,000	500

Factors and Timeframes Affecting Spread Fluctuations

Spread fluctuations are influenced by the following factors:

Market Liquidity:

When liquidity is high, spreads tend to narrow as buyers and sellers are easier to match. Conversely, during low liquidity, spreads may widen.

Economic Events:

Economic reports, political events, breaking news, or natural disasters can create market volatility, often leading to wider spreads.

Trading Sessions:

During overlapping major financial market sessions (e.g., London and New York), liquidity is at its highest, often resulting in narrower spreads. Spreads may widen during market opening or closing hours.

Introducing the Best Timeframes for Forex Trading

Broker Policies:

Different brokers may offer varying spreads depending on their risk management strategies and market positioning.

Broker Policies:

Different brokers may offer varying spreads depending on their risk management strategies and market positioning.

What is the Spread at Titan FX?

Titan FX offers different spreads depending on the account type. Our Standard, Blade, and Micro accounts each provide unique spread advantages.

Below are the average spreads for major currency pairs:

Currency Pair	Standard	Blade	Micro
EUR/USD	1.20	0.20	1.40
GBP/USD	1.57	0.57	1.77
AUD/USD	1.52	0.52	1.72
USD/JPY	1.33	0.33	1.53
USD/CHF	1.92	0.92	2.12

Titan FX provides competitive spreads tailored to the needs of different trading styles and strategies.

How to Check Real-Time Spreads on MT4/MT5

You can view real-time spreads directly in the Market Watch section of MT4/MT5.

MT4 (MetaTrader 4)

• 1.Open Market Watch.
• 2.Right-click anywhere in the list.
• 3.Select Spread to view the live spreads.

MT5 (MetaTrader 5)

• 1.Open Market Watch.
• 2.Right-click anywhere in the list and select Columns.
• 3.Choose Spread to display the real-time spreads.