Bid, Ask & Spread: How Brokers Make Money & Your Costs

To understand the spread, you must first understand the auction nature of the market. When you go to a currency exchange booth at the airport, you see two prices on the board: 'We Buy USD at 0.85' and 'We Sell USD at 0.90'. That gap is their profit. Online trading works exactly the same way, just with tighter margins and faster execution.

**1. THE ANATOMY OF A QUOTE**

When you look at the EUR/USD on your terminal, you are not seeing one price. You are seeing two.

* **The Bid (Lower Price):** This is the highest price the market is willing to pay *you* for the currency. If you want to **SELL** right now, this is the price you get.
* **The Ask (Higher Price):** This is the lowest price the market is willing to sell *to* you. If you want to **BUY** right now, this is the price you pay.

**The Gap:**
Imagine EUR/USD is quoted at **1.1050 / 1.1052**.
* Bid: 1.1050
* Ask: 1.1052
* Spread: 2 Pips.

If you click 'Buy', you get filled at 1.1052. If you realize you made a mistake and immediately click 'Close' (which means selling it back), you sell at the Bid of 1.1050. You have lost 2 pips instantly without the market moving a single inch.

**2. CALCULATING THE COST**

Many traders ignore the spread because it looks like a small number. Let's do the math on a standard account over a month.

* **Asset:** GBP/JPY (Volatile pair).
* **Average Spread:** 3 Pips.
* **Pip Value:** ~$9.00 per Standard Lot.
* **Volume:** 1.00 Lot.

Every time you click the button, you pay: 3 pips x $9 = **$27**.

If you take 2 trades a day for 20 days (40 trades total):
* Total Cost = 40 trades x $27 = **$1,080**.

This $1,080 is deducted from your account regardless of whether you win or lose. If your strategy made $2,000 in gross profit, your net profit is only $920. The broker took over 50% of your earnings. This demonstrates why high-frequency trading (scalping) is extremely difficult for retail traders on pairs with wide spreads. You are fighting uphill against the transaction costs.

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**3. THE 'PHANTOM' STOP OUT (The Ask Line)**

This is the most common conspiracy theory in trading forums: *"The broker hunted my stop loss! The chart shows the high was 1.1060, my stop was at 1.1062, but I still got stopped out! Scammers!"*

Here is what likely happened. It wasn't a scam; it was a misunderstanding of how charts are drawn.

**The Rule of Charts:**
Almost every candlestick chart you see (TradingView, MT4) is drawn using the **BID** price. It shows the selling price history.

**The Scenario (Short Trade):**
1. You Sell EUR/USD. You want the price to go down.
2. You place a Stop Loss at 1.1062. (To close a Sell trade, you must BUY back the position).
3. Buying back requires the **ASK** price.

**The Event:**
News comes out. The spread widens.
* **Bid Price (Chart):** 1.1060.
* **Spread:** Widens to 5 pips.
* **Ask Price (Invisible):** 1.1065.

Your Stop Loss is at 1.1062. The Ask price hit 1.1065. Your Stop Loss is triggered and the trade is closed.
However, the chart only draws the Bid (1.1060). You look at the chart and see the wick never touched your line. You feel cheated.

**The Solution:**
In your trading platform settings, always enable **"Show Ask Line"**. This will display a second horizontal line on your chart (usually red) showing the current buy price. You will be shocked at how far away it can get from the Bid price during volatility.

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**4. FIXED VS. VARIABLE SPREADS**

* **Fixed Spreads:** Some brokers (Market Makers) offer a fixed spread (e.g., 2 pips on EUR/USD always).
* *Pros:* Predictable costs.
* *Cons:* Usually higher than average. During intense news, the broker may simply not execute your trade ('Re-quote') because they can't cover that spread in the real market.

* **Variable (Floating) Spreads:** ECN and STP brokers pass the real market spread to you.
* *Pros:* Very tight during liquid times (e.g., 0.1 or 0.5 pips on EUR/USD).
* *Cons:* Can explode during news. I have seen the spread on GBP/NZD go from 5 pips to 100 pips during a flash crash event.

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**5. WHEN DO SPREADS WIDEN? (The Danger Zones)**

Liquidity is what keeps spreads tight. When liquidity disappears, spreads widen. There are three main times this happens:

**A. Major News Releases (NFP, CPI, Rate Decisions):**
Milliseconds before a number is released, the big banks (liquidity providers) pull their orders because they don't want to get caught on the wrong side. The order book thins out.
* *Result:* Spreads 5x or 10x their normal size. If you try to enter a trade exactly at the news release, you might pay 20 pips just to get in.

**B. The 'Rollover' (5:00 PM EST):**
This is the end of the Forex banking day (New York close). For about an hour (5:00 PM to 6:00 PM EST), the banking systems reset for the next day. Liquidity drops to near zero.
* *Danger:* If you are holding a trade open through 5:00 PM EST, watch your Stop Loss. Even if the market price doesn't move, the *spread* might widen enough to hit your Stop Loss if it is too close.

**C. Bank Holidays:**
If London and New York are closed for Christmas or Easter, the market is technically open, but volume is non-existent. Spreads will be ugly. Stay away.

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**6. ECN vs. ZERO SPREAD ACCOUNTS**

Many brokers offer two account types. It is vital you choose the one that fits your math.

* **Standard Account:**
* Spread: Wide (e.g., 1.5 pips).
* Commission: $0.
* *Best For:* Swing traders who hold for days. The spread is a one-time fee that doesn't matter much on a 100-pip target.

* **Raw / ECN Account:**
* Spread: Tight (e.g., 0.0 or 0.1 pips).
* Commission: Fixed fee (e.g., $7 per round lot).
* *Best For:* Scalpers and Day Traders. You need the precision of entering exactly at the market price without an arbitrary markup.

**The Math Check:**
Usually, the Raw account is cheaper.
* Standard: 1.5 pips spread = $15 cost per lot.
* Raw: 0.1 pip spread ($1) + $7 commission = $8 total cost per lot.
* *Verdict:* The Raw account saves you almost 50% in costs, but requires you to pay a commission separately.

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**CONCLUSION**

The spread is the gatekeeper of the market. You must pay the toll to enter. While you cannot eliminate it, you can minimize it by trading during high-liquidity sessions (London/New York overlap), avoiding the 5:00 PM EST rollover window, and choosing the correct account type for your strategy.

Never forget the **Ask Line**. If you are Short, you are at the mercy of the Ask price. If you are Long, you sell at the Bid. Keep this distinction clear, and you will never again be confused by a 'Phantom' Stop Out. In the next lesson, we will explore the different tools you can use to enter the market: Market, Limit, and Stop orders.