Here's a question every new trader asks within their first week — usually right after they notice their trade is already in the red the moment they enter it. That stings. And the culprit, more often than not, is the spread. It sounds simple, but its full impact on your trading costs is genuinely easy to underestimate.

The spread is the difference between the price a broker will sell you an asset (the ask) and the price they'll buy it back from you (the bid). If EUR/USD shows a bid of 1.0800 and an ask of 1.0803, the spread is 3 pips. You start every trade three pips behind. Before the market moves a single tick in your favour, you're already paying a toll.

CONCEPTThe spread is the broker's built-in fee — you pay it the instant you enter a trade, visible or not.
WARNINGHigh-frequency traders get destroyed by wide spreads — small costs compound into massive losses at scale.
KEY IDEAA tighter spread means less ground to recover before a trade becomes profitable — always compare before you commit.

Think of it like buying a second-hand car from a dealer. They buy your old car for $18,000 and sell you one for $20,000. That $2,000 gap is their spread — their margin for facilitating the transaction. Markets work identically. The market maker sits in the middle, quoting both sides, and earns the difference on every trade that crosses their desk.

Bid-Ask SpreadBID1.0800ASK1.0803SPREAD3 pipsYou sell hereYou buy here

Spreads vary enormously. Liquid markets like major forex pairs or large-cap ASX stocks carry tight spreads. Exotic currency pairs, small-cap stocks, or thinly traded instruments can have spreads wide enough to genuinely distort your strategy's edge. Scalpers especially need to account for this — a strategy requiring 5-pip targets doesn't survive a 4-pip spread. For deeper background, the mechanics are well covered on Investopedia's bid-ask spread page, while the broader market structure context is explained clearly on Wikipedia's bid-ask spread article. If you trade CFDs or forex through a market maker, also worth understanding how market makers profit from the spread — it reframes a few assumptions fast.

Before your next trade, calculate the spread as a percentage of your target profit. If it's eating more than 20% of your expected move, you're fighting uphill from the bell.

This content is for educational purposes only and does not constitute financial product advice. Past performance is not indicative of future results. Profit Logic Ltd (ACN 688 669 936) accepts no responsibility for errors or omissions in this content or anywhere on this website. Always seek advice from a licensed financial adviser before making investment decisions.