What Is the Bid-Ask Spread, and How Does It Affect Your Trading Profits?

By Luis

Published: november 04, 2026

Last updated: November 04, 2026

Introduction

A trader can correctly anticipate the direction of a financial market and still lose money on a position. This may seem contradictory. If the price moves in the expected direction, shouldn't the trade become profitable?

The answer lies partly in the way financial markets execute transactions. When a trader buys or sells an asset, the price available for buying is generally different from the price available for selling. That difference is called the bid-ask spread, and it represents one of the most fundamental costs of participating in financial markets.

The spread is easy to overlook because it often appears as a small difference between two numbers on a trading platform. However, it affects the price at which a position begins, how much the market must move before the trade becomes profitable, and how much money remains after repeated transactions.

To understand its real impact, it is necessary to look beyond the definition. The spread is connected to the interaction between buyers and sellers, the economics of providing liquidity, the risks faced by market makers, and the conditions that determine how expensive immediate execution becomes.

——-

What Is the Bid-Ask Spread?

The bid-ask spread is the difference between the highest price a buyer is currently willing to pay for an asset and the lowest price a seller is currently willing to accept.

These prices represent two different intentions within the same market.

The bid price is the highest available buying price. It is generally the price a trader receives when selling immediately. The ask price, also called the offer price, is the lowest available selling price. It is generally the price a trader pays when buying immediately.

The spread is calculated by subtracting the bid from the ask:

Bid-Ask Spread = Ask Price − Bid Price

Consider EUR/USD quoted at 1.0840 bid and 1.0842 ask. The difference is 0.0002, equivalent to two pips when the currency pair is quoted to four decimal places.

A trader who buys immediately generally enters at 1.0842, not 1.0840. Someone selling immediately generally receives 1.0840, not 1.0842.

This distinction matters because a chart displaying a single price does not necessarily show the price at which a trader can execute an order. The last traded price, the midpoint between bid and ask, and the actual prices available for buying and selling are different concepts.

The midpoint is sometimes used as a reference for evaluating execution quality:

Midpoint = (Bid + Ask) ÷ 2

In this example, the midpoint is 1.0841. It represents the center of the quoted spread, but it does not mean that a trader can automatically buy or sell at that price.

The spread therefore describes the immediate price difference between the two sides of a market. It is not simply a technical feature of a trading platform; it reflects the conditions under which participants are willing to exchange an asset.

SEC+1

——-

Why Do Buying and Selling Prices Differ?

The difference between bid and ask prices exists because buyers and sellers do not have identical expectations.

A buyer may believe an asset is worth less than its current selling price and therefore submit an order at a lower level. A seller may believe the asset is worth more and refuse to accept that offer. Until their prices meet, no transaction occurs between them.

Financial markets solve part of this problem by allowing participants to make prices available to others.

This is where liquidity providers become important. They include market makers, dealers, financial institutions, and participants who place limit orders. By making buying and selling interest available, they help other traders enter or exit positions without waiting for a specific counterparty.

A market maker, for example, may quote EUR/USD at 1.0840 bid and 1.0842 ask. A trader who wants to buy immediately accepts the ask, while someone who wants to sell immediately accepts the bid.

The market maker is offering immediacy: the ability to transact at available prices rather than waiting for another participant to accept a preferred price.

However, providing this service involves risk. A market maker that buys an asset may find that its price falls before the position can be sold or hedged. If it sells an asset, the price may rise before the position is covered. The spread can compensate for some of these risks, as well as operational costs and the capital required to maintain trading activity.

This explains an important economic relationship: the spread is partly the price of immediate execution.

A trader who wants to buy or sell immediately accepts the prices currently available. A trader who is willing to wait can instead place a limit order and attempt to obtain a more favorable price. Neither approach is automatically better; each involves a different trade-off between execution certainty and price control.

It is also important not to assume that every broker earns the entire spread. Depending on the market and brokerage model, a broker may act as a market maker, route orders to external venues, use external liquidity providers, or charge a separate commission. The spread shown on a platform does not reveal by itself how the broker is compensated.

CME Group+1

——-

How Does the Bid-Ask Spread Create an Immediate Trading Cost?

The spread creates a cost because a trader generally enters and exits a position using opposite sides of the quote.

Imagine that EUR/USD is trading at 1.0840 bid and 1.0842 ask. A trader expects the euro to appreciate and opens a buy position.

The purchase is executed at 1.0842 because that is the available selling price. If the trader immediately closes the position while the quotes remain unchanged, the sale takes place at 1.0840.

The difference is two pips.

The trader has lost two pips even though the market has not moved. The loss comes from the difference between the buying and selling prices, not from an unfavorable movement in the exchange rate.

This is why a position can show a negative result immediately after it is opened. The market must move sufficiently in the trader's favor to overcome the spread before the position can produce a positive result, assuming no other costs or price changes.

The same mechanism applies to short positions, although the order of transactions is reversed. A trader opening a short position generally sells at the bid. To close it, the trader must buy at the ask. The difference between those prices also creates an initial trading cost.

The important concept is that the spread affects both entry and exit. It is not a fee that only matters when opening a trade. It is embedded in the prices available whenever the trader transacts.

This also explains why the spread should be considered when calculating a trade's risk-to-reward relationship. If a strategy targets a relatively small movement, the cost of crossing the spread can consume a meaningful portion of the expected gain.

——-

How Does a Wider Spread Reduce Trading Profits?

A wider spread increases the distance between the price at which a trader can buy and the price at which the trader can sell immediately.

Suppose EUR/USD has a one-pip spread during a period of normal market conditions. Later, the spread increases to four pips because liquidity has declined or market uncertainty has increased.

If a trader buys under the first condition, the position begins with a one-pip difference between its entry price and the immediately available exit price. Under the second condition, that difference is four pips.

The market does not need to move against the trader for this additional cost to occur. It is already present in the available quotes.

The financial impact also depends on position size. In a standard EUR/USD position of 100,000 units, one pip is approximately worth $10 in a USD-denominated account under typical exchange-rate conditions. A one-pip spread would therefore represent approximately $10, while a four-pip spread would represent approximately $40.

These are illustrative figures. Actual pip values depend on the instrument, exchange rate, contract specifications, and account currency.

The mechanism becomes particularly important when traders increase their position size. A spread that seems insignificant when trading a small position can represent a substantial expense when the same instrument is traded in larger quantities.

There is another consequence: the spread affects the amount of market movement required to reach a profit target.

Imagine a strategy designed to capture five pips. If the spread is one pip, a significant portion of the expected movement remains available after accounting for the initial spread cost. If the spread is four pips, the cost consumes a much larger share of the intended movement.

This is why a strategy cannot be evaluated solely by the distance between its entry and target prices. Its expected movement must be considered alongside the costs of execution.

The wider the spread relative to the expected price movement, the harder it becomes for a trade to generate a positive net result.

——-

What Determines Whether a Spread Is Narrow or Wide?

Spreads change because the conditions that make liquidity available are constantly changing. The number of buyers and sellers, the risks associated with holding positions, and the speed of price movements all influence the prices participants are willing to offer.

One of the most important factors is market liquidity.

Liquidity describes how easily an asset can be bought or sold without causing a substantial change in its price. A market with many competing participants and sufficient available orders can generally match buying and selling interest more efficiently.

When several buyers compete to purchase an asset and several sellers compete to offer it, their prices may become closer together. This competition can produce a narrower spread.

In a market with limited participation, the situation can be different. Buyers may only be willing to pay considerably less than sellers are asking. A transaction becomes more difficult to arrange without one side accepting a less favorable price, so the spread may widen.

This helps explain why major currency pairs such as EUR/USD generally have tighter spreads than less frequently traded currency pairs. The difference is not simply that one currency pair is more popular. It reflects the depth of available trading interest and the ability to execute transactions without significantly affecting prices.

Volatility introduces another mechanism.

When prices move rapidly, liquidity providers face a greater risk that the quote they offer will become outdated before a transaction is completed or hedged. A market maker offering to sell at a particular price may suffer a loss if the asset rises sharply moments later.

To compensate for this uncertainty, liquidity providers may increase the distance between their bid and ask prices, reduce the quantity available, or temporarily withdraw some quotes.

As a result, high volatility can produce wider spreads even when trading activity is substantial. A market can experience intense buying and selling while still becoming more expensive to trade because participants are less willing to provide liquidity at closely matched prices.

The timing of trading activity also matters. In the foreign exchange market, participation changes as financial centers open and close. Periods when major trading sessions overlap often attract significant activity, while quieter periods may offer less available liquidity.

However, a busy market does not automatically guarantee a narrow spread. What matters is not only how many transactions occur, but also how much buying and selling interest is available at each price and how willing participants are to maintain those quotes.

Economic announcements create another important situation. Interest rate decisions, inflation reports, employment data, and unexpected political developments can rapidly change expectations about the value of financial assets.

Before such announcements, some liquidity providers may reduce their exposure because the potential price movement becomes harder to predict. Once new information reaches the market, prices can adjust rapidly and previously available quotes may disappear.

Consequently, spreads can widen around major economic releases. This is particularly relevant to short-term traders who may be exposed to higher execution costs precisely when market movements become more dramatic.

——-

Why Does the Spread Affect Scalping More Than Long-Term Trading?

The importance of the spread depends partly on the relationship between transaction costs and the price movement a strategy attempts to capture.

Scalping illustrates this relationship particularly well. A scalper seeks to profit from relatively small price changes and may open and close several positions within a short period.

Because the expected gain per trade is limited, the spread can consume a substantial portion of the potential profit. A strategy targeting a few pips has much less room to absorb a wide spread than one targeting a much larger movement.

The effect becomes more pronounced when the trader executes many transactions. Every new position creates another opportunity for the spread to affect the result. Even if each individual cost appears small, repeated transactions can make the total expense significant.

Day trading faces a similar issue, although the expected movements may be larger. A trader who opens several positions during a session must account for the spread every time a position is entered and exited. The cumulative cost can influence whether a strategy remains profitable over a large number of trades.

Swing trading usually operates under different conditions. Positions may remain open for several days or weeks, with the objective of capturing larger market movements.

Because the expected price movement is often greater, the spread may represent a smaller proportion of the intended gain. However, it does not disappear as a cost. A wide spread can still affect the initial entry, the effective exit price, and the overall performance of the strategy.

The underlying principle is that transaction costs matter in proportion to the opportunity being pursued. A spread that is relatively insignificant for a long-term position can be decisive for a strategy attempting to capture very small movements.

——-

How Do Market Orders and Limit Orders Interact With the Spread?

The type of order a trader uses determines how the transaction interacts with available liquidity.

A market order prioritizes execution over price certainty. When buying, it generally accepts available selling prices, beginning with the best ask. When selling, it accepts available buying prices, beginning with the best bid.

This allows traders to enter or exit a position without waiting for the market to reach a specific price. However, the final execution price is not guaranteed.

The reason is that displayed prices only represent the available quantity at a particular moment. If a trader submits an order larger than the quantity available at the best price, the remaining portion may execute at less favorable prices.

For example, a market order to buy a large quantity of an asset may consume all the available selling interest at the lowest ask. The remaining quantity must then be matched with sellers offering higher prices.

This creates an additional execution cost beyond the initial quoted spread. It is one reason why the price displayed before placing an order may differ from the average price received after execution.

A limit order works differently because the trader specifies the maximum price they are willing to pay when buying or the minimum price they are willing to accept when selling.

Suppose EUR/USD has an ask price of 1.0842. A trader who does not want to pay that price could submit a buy limit order at 1.0840. The order can only execute at 1.0840 or lower.

However, the market must reach that price, and sufficient selling interest must be available. If the price never reaches the limit, the order remains unfilled.

Limit orders therefore provide price control but do not guarantee execution. Market orders provide a greater priority on immediate execution but expose the trader to the available prices and potential changes during execution.

This distinction reveals a central feature of market structure: trading always involves a choice between the price a participant wants and the immediacy of the transaction.

Investor.gov+2

——-

Is the Bid-Ask Spread the Same as a Broker's Commission?

The spread and commission both affect trading costs, but they represent different mechanisms.

The spread is the difference between the buying and selling prices available in the market. A commission is an explicit fee charged for executing a transaction or providing a brokerage service.

This distinction matters because two brokers can advertise different pricing structures while producing similar total costs.

One broker may offer commission-free trading but provide a wider spread. Another may charge a commission while offering access to tighter prices.

The difference reflects how the broker organizes execution and generates revenue.

In some arrangements, a broker acts as the counterparty to a client's trade and may incorporate compensation into its quoted prices. In other arrangements, the broker routes orders to external liquidity providers or trading venues and charges a separate commission. Some brokers combine these models depending on the instrument and account type.

It would therefore be inaccurate to assume that the spread displayed on every trading platform represents pure broker profit. In markets with multiple liquidity providers, the quoted spread may reflect external market conditions, the broker's pricing arrangement, and additional costs associated with execution.

The spread is also not the only cost that can affect the final result.

Slippage occurs when an order executes at a different price from the one expected. It can happen because prices change while an order is being processed or because the available quantity at the displayed price is insufficient.

Financing costs may apply when certain leveraged positions are held overnight. In forex and CFDs, these charges can depend on the instrument, position size, interest-rate differentials, and the broker's contractual terms.

A trader evaluating a broker must therefore look beyond the advertised spread. The relevant measure is the complete cost of opening, maintaining, and closing a position under realistic market conditions.

——-

Why Is a Narrow Spread Not Always Enough to Guarantee Cheap Execution?

A narrow spread can indicate that the best buying and selling prices are close together, but it does not reveal how much liquidity is available at those prices.

This distinction becomes important when order size increases.

Financial markets often display multiple levels of buying and selling interest. The best bid and ask represent the most favorable currently available prices, but they may only cover a limited quantity.

Imagine that the best ask for an asset is $100.00, but only 100 units are available at that price. A trader submitting a market order to buy 1,000 units cannot necessarily purchase the entire position at $100.00.

After the first 100 units are executed, the remaining order may need to purchase from sellers offering higher prices. The average execution price becomes greater than the initial ask.

The difference between the expected price and the actual average execution price is related to market impact.

Market impact occurs when the execution of an order changes the available prices or consumes liquidity at certain levels. It is particularly relevant when large orders are placed in markets with limited depth.

This explains why two markets with identical quoted spreads can produce very different execution costs for large transactions.

The first may have substantial quantities available close to the best bid and ask. The second may have very little liquidity at those prices, forcing a large order to move through several levels of the order book.

Therefore, evaluating liquidity requires more than looking at the spread. Traders must also consider market depth, available quantities, order size, and the possibility that prices will change during execution.

A narrow spread describes the distance between the best quotes. It does not guarantee that every transaction can be completed at those prices.

SEC+1

——-

How Should Traders Evaluate the Spread Before Opening a Position?

The spread becomes useful information when traders incorporate it into their assessment of execution costs.

The first consideration is the actual bid and ask, rather than relying exclusively on the price displayed as a single line on a chart. Depending on the platform and instrument, that line may represent the bid, the ask, the midpoint, or another reference price.

Understanding which price is being displayed helps prevent confusion between the chart price and the price at which an order can actually be executed.

The next consideration is how the spread behaves under different market conditions. A currency pair may have relatively narrow spreads during periods of strong liquidity but become more expensive around economic announcements or during quieter trading hours.

Observing these changes helps traders distinguish between the normal cost of trading an instrument and temporary increases caused by unusual market conditions.

Position size must also be considered. A spread should be evaluated in monetary terms, not only in pips or points. Converting it into the account currency reveals how much the difference between buying and selling prices actually represents for a particular position.

Another important consideration is the relationship between the spread and the strategy's expected movement. If a strategy targets small price changes, even a modest spread can consume a large portion of its potential return.

Finally, trading strategies should be evaluated using realistic execution assumptions. A backtest that ignores spreads, commissions, and slippage can exaggerate profitability because it assumes that every transaction occurs at ideal prices.

The purpose is not to find a market with the smallest displayed spread at every moment. It is to understand how much execution costs affect the strategy under the conditions in which it will actually operate.

——-

Conclusion

The bid-ask spread is more than the difference between two prices on a trading platform. It is a fundamental part of how financial markets connect buyers and sellers, provide immediate execution, and distribute the costs and risks of supplying liquidity.

The spread exists because participants have different expectations and because providing immediate access to a market requires other participants to accept execution and inventory risks. Its size changes with liquidity, volatility, market activity, and the availability of competing orders.

For traders, the consequence is direct: every transaction takes place within a pricing structure that can affect profitability before the market moves in their favor. The impact becomes especially important when expected price movements are small, positions are large, or transactions are repeated frequently.

Understanding the spread also reveals why the quoted price alone is not enough to evaluate trading conditions. Market depth, order size, execution type, commissions, and slippage all influence the actual cost of a transaction.

Ultimately, predicting the direction of a market is only one part of trading. A strategy must also account for the cost of accessing that market and the conditions under which its orders are executed. The bid-ask spread connects these two realities, showing why the difference between buying and selling prices can have a lasting effect on trading performance.