Bid and Ask Prices Make the Spread

Each quoted market will have a 'bid' and an 'ask' price. The 'bid' is the price a trader enters the market short (a sell order), whereas as the 'ask' is the price a trader enters the market long (buy).

The difference between the bid and the ask is the spread, which is measure in 'pips' (percentage in points).

Example of EUR/USD quote

Bid / Ask

1.2020 / 1.2021

Spread = Ask - Bid

Spread = 1 pip

The Spread is The Cost of Entry

The spread is a nominal transaction fee for entering a trade. Whilst traders enter the market short (sell) at the bid, their initial profit and loss (P&L) will be calculated from the ask price. This means a trade will be slightly negative once a trade is opened.

Conversely, a trader who enters long (buys) at the ask will have their profit calculated at the bid.

Short trade: Enters at bid price, P&L calculated from ask price
Long trade: Enters at the ask price, P&L calculated from bid price


Our Spreads Are Variable

A variable spread means the width of the spread fluctuates over time. A wider spread will cost more to enter a trade than a tighter spread, and the width can vary between markets and throughout the trading day.

Highly liquid markets such as EUR/USD and USD/JPY have spreads starting at 0.0 pips! But these can widen if liquidity (trading volumes are lower). Yet currency crosses such as GBP/JPY or exotics such as USD/MXN would typically have wider spreads.

Asian session tend to generate less volume so spreads can increase slightly. Spreads can also be wider during public holidays or ahead of high impact economic data.

Our Spreads Are Variable