Understanding Price Discrepancy (Spread): Definition, Calculation, and Control Strategies

In the world of financial trading, spread is one of the fundamental concepts that every investor needs to understand. Although simple, it has a direct impact on your profits. This article will explain in detail about the spread, how it works, and ways to optimize this cost.

What Is Spread? Basic Concepts You Need to Know

Spread is the difference between the bid (bid) price and the ask (ask) price of an asset in trading.

More specifically:

• Bid (Buy Price): The price at which you can sell the asset to the exchange
• Ask (Sell Price): The price you must pay to buy the asset from the exchange

The calculation formula is very simple: SPREAD = ASK (Ask) - BID (Bid)

Example: The EUR/USD currency pair has a bid price of 1.1021 and an ask price of 1.1023. Then, the spread = 1.1023 - 1.1021 = 0.0002 (equivalent to 2 pips).

Why Does Spread Exist?

Spread is a profit mechanism for trading platforms and service providers. Instead of charging direct transaction fees, they earn money through the difference between these two prices.

From the platform’s perspective, the spread compensates for:

• Market risk: When they accept a sell order from you, they need to find a buyer, during which time prices can fluctuate
• Operating costs: Including systems, personnel, and market liquidity
• Self-protection: In highly volatile markets, the spread widens to protect the platform’s finances

Measurement Unit: What Is a Pip?

1 pip = 0.0001 – this is the smallest price movement unit of a currency pair.

When saying the spread is 2 pips, it means the difference is 0.0002. For a standard lot, each pip corresponds to a certain amount of money you need to know when calculating transaction costs.

Two Main Types of Spread: Fixed vs. Variable

Fixed Spread: Advantages and Disadvantages

Definition: The trading platform maintains a constant spread regardless of market conditions.

Advantages:

• Easy to predict costs: You always know in advance how much fee to pay
• Low capital requirement: Suitable for beginner traders
• No price shocks: No worries about sudden spread widening

Disadvantages:

• Requote phenomenon: When the market moves quickly, the platform may reject your requested price and offer a new one
• Slippage (Slippage): The actual transaction price differs from your expected price
• Less flexible: Fixed spreads can be higher than the actual competitive market rate

Variable Spread: Flexible but Risky

Definition: The spread changes continuously according to market conditions.

Advantages:

• Eliminates Requote: Transactions are executed immediately
• Transparent prices: Reflect real prices from multiple liquidity providers
• Narrow spreads: Usually lower than fixed spreads during peak hours

Disadvantages:

• Unpredictable costs: Fees can change unexpectedly
• Reduced efficiency during high volatility: Scalpers may find it difficult
• News risk: When important news is released, spreads can widen suddenly

How to Calculate Spread in Practice

Suppose you trade the EUR/USD pair:

• Ask price: 1.14509
• Bid price: 1.14500

Spread = 1.14509 - 1.14500 = 0.00009 = 0.9 pips

If trading 1 lot, the spread cost is 9 USD. If trading 10 lots, the cost is 90 USD.

Note: The value of each pip and contract size varies depending on the trading platform.

Spread Widening Phenomenon: When the Difference Suddenly Increases

Spread widening occurs when the bid-ask difference increases beyond normal, from 1-2 pips up to 5-10 pips or more.

( When Does Spread Widening Occur?

1. During Market Session Transitions

• Low liquidity, fewer traders active
• Fewer buyers/sellers → increased spread
• Transaction costs become significantly higher

2. Major News Announcements

• Before news release, platforms often widen spreads for protection
• After news release, price volatility can be especially large
• Potential profits can vanish in an instant

3. High Market Volatility

• Markets are turbulent, prices jump around
• Platforms cannot maintain narrow spreads
• Slippage risk increases significantly

) How to Avoid Spread Widening

• Avoid trading during low liquidity hours
• Monitor economic calendars to know when major news is announced
• Choose major currency pairs like EUR/USD, GBP/USD with higher liquidity

Factors Affecting Spread

( 1. Liquidity The more traders trading an asset, the narrower the spread. EUR/USD has the highest liquidity, so its spread is relatively small.

) 2. Trading Volume Assets with high trading volume usually have tighter spreads due to competition among market makers.

3. Price Volatility

During high volatility periods, when prices change rapidly, spreads automatically widen due to increased risk.

4. Trading Hours

Peak hours ###overlap of European and US sessions### have the narrowest spreads.

Strategies to Minimize Spread Costs

Strategy 1: Choose Optimal Trading Times

Trade during the most active hours:

• Overlap between London and New York sessions
• High liquidity and strong competition among market makers
• Spreads tend to be the narrowest

Strategy 2: Focus on Major Currency Pairs

High liquidity pairs like EUR/USD, GBP/USD have stable and narrow spreads:

• Many traders trading → high competition
• Platforms are motivated to keep spreads narrow to attract more clients
• Avoid less traded currency pairs

( Strategy 3: Select Suitable Trading Platforms

Different platforms have different operating models and spread levels:

• No Dealing Desk platforms usually have smaller spreads
• Compare spreads across platforms with the same contract size

) Strategy 4: Smart Position Management

• Avoid trading immediately before major news releases
• Use reasonable Stop-Loss orders to prevent liquidation due to slippage
• Scalpers should only trade pairs with extremely narrow spreads

Spread in Different Markets

Stock Market

The difference between the bid ###investors willing to buy### and the ask (investors willing to sell) for stocks. Large-cap stocks tend to have narrow spreads, small-cap stocks often have wider spreads.

Bond Market

Spread in bonds is the difference in yields. For example: US government bonds with a 5% yield and UK government bonds with a 6% yield have a spread of 1%.

Futures Commodity Market

Spread here is the price difference of the same commodity at different maturities. For example: wheat futures contracts for January and October.

Conclusion: Managing Spread to Maximize Profits

Spread is an unavoidable cost in trading, but you can completely control it.

Key points to remember:

• Understand the difference between fixed and floating spreads
• Trade during high liquidity times
• Prioritize major currency pairs with narrow spreads
• Avoid trading around news release times
• Compare trading conditions across different platforms

Before applying any strategy, test it in a Demo environment to understand how spread impacts profits. The more traders master the details, the better their chances of reducing costs and maximizing profits.