The spread is the difference between the ask price, at which you buy, and the bid price, at which you sell. If EUR/USD is quoted at 1.08500 / 1.08512, the spread is 1.2 pips. The moment you buy at the ask, the position is valued at the bid, so a new trade starts 1.2 pips in loss before the market has moved at all.
The spread is how a broker without commission earns its income, and it is the most reliable cost in trading because it is paid on every trade, whether the trade wins or loses.
Typical spreads
Spreads are lowest on the most heavily traded instruments during the busiest hours. On a standard account, EUR/USD typically trades at around one pip during the London and New York sessions, GBP/USD a little wider, and yen and commodity-currency pairs wider still. Raw or ECN accounts show spreads near zero on the majors and charge a separate commission instead, which is covered on the next page. Gold and index spreads are quoted in cents or points and vary widely between brokers.
The figures a broker advertises are its best case. What matters is the spread at the moment your trade is placed, and that changes through the day.
When spreads widen
Spreads widen whenever fewer participants are quoting. That happens around the daily rollover at 10pm UK time, when many banks briefly withdraw prices; in the hour after the Sunday open; during the late New York and early Asian sessions; in the seconds around major scheduled news, such as US employment figures or a central bank decision, when a normally one-pip spread can go to ten or twenty; and during any sudden market event.
A trade placed into a wide spread pays that spread in full. A stop loss triggered by a wide spread is a real loss even if the market never actually traded at that level, because a long position is closed at the bid, and it is the bid that drops when the spread widens.
You trade one standard lot of EUR/USD on an account with a 1.2-pip spread. Each trade costs $12 in spread. If your average trade makes 8 pips, or $80, the spread takes 15 per cent of every winner. If your average trade makes 2 pips, the spread takes 60 per cent. At an average of one pip, you are trading for the broker. Over a year of daily trades, 250 trades at $12 is $3,000 in spread on a one-lot strategy before any commission.
Now compare a strategy that averages 60 pips a trade. The same $12 spread is two per cent of the average winner. It is nearly irrelevant.
The spread is the first thing that separates strategies that work in theory from strategies that work in an account. Systems that trade many times a day for a few pips each rarely survive a realistic spread, and most of them are backtested at a fixed, favourable spread that never widens. Any backtest an EA vendor shows should state the spread it assumed, and whether it was variable.
A spread filter is a simple and essential control. Before opening a trade, the EA compares the current spread to a maximum it is prepared to pay, and if the spread is wider it waits. That single check keeps an EA out of the rollover, the news spike and the thin Sunday open, which is where a large share of avoidable losses happen. It also means the EA will occasionally skip a trade that would have worked. That is the correct trade-off.