Execution costs, liquidity, and why spreads are not just a number

Introduction: the hidden cost in every trade

Every forex trader encounters the bid-ask spread, often within seconds of placing their first trade. It appears simple—a small difference between two prices—but its implications are widely misunderstood.

Many beginners view the spread as a minor inconvenience or a fixed fee imposed by brokers. In reality, the bid-ask spread reflects market liquidity, participation, and execution quality. It is one of the most important structural factors affecting trading performance, particularly for short-term and active traders.

This article explains what the bid-ask spread is, why it exists, how it changes, and why understanding it is essential for managing risk and expectations.

What is the bid-ask spread?

The bid-ask spread is the difference between:

  • The bid price — the price at which the market is willing to buy
  • The ask price — the price at which the market is willing to sell

If EUR/USD is quoted as:

Bid: 1.1000
Ask: 1.1002

The spread is 2 pips.

Every trade begins at a small unrealized loss equal to the spread. This is not a penalty; it is the cost of accessing liquidity.

Why the spread exists

The spread exists because markets require liquidity providers to facilitate transactions. Banks, institutions, and market makers quote both bid and ask prices, assuming risk in exchange for compensation.

That compensation is embedded in the spread.

The tighter the spread, the more competitive and liquid the market. Wider spreads indicate lower liquidity, higher uncertainty, or increased risk for liquidity providers.

How liquidity influences the spread

Liquidity is the primary driver of spread behavior.

High-liquidity conditions generally produce:

  • Tighter spreads
  • Faster execution
  • Lower slippage

Low-liquidity conditions often result in:

  • Wider spreads
  • Increased execution risk
  • Price gaps and slippage

This is why major currency pairs during active sessions typically have narrower spreads than minor or exotic pairs traded during off-hours.

Spread behavior across currency pairs

Not all currency pairs trade equally.

  • Major pairs usually have the tightest spreads due to deep institutional participation
  • Minor pairs have moderately wider spreads
  • Exotic pairs often have significantly wider spreads due to lower liquidity and higher risk

Understanding these differences helps traders choose instruments that align with their strategy and cost tolerance.

Spread expansion during volatile periods

Spreads are not fixed. They expand and contract based on market conditions.

Common causes of spread widening include:

  • Major economic data releases
  • Central bank announcements
  • Periods of low liquidity (session transitions, holidays)
  • Sudden geopolitical developments

During these moments, liquidity providers protect themselves by widening spreads to manage uncertainty. Traders who ignore this behavior often experience unexpected losses or poor execution, even when their market direction is correct.

Why the spread matters more for some traders

The impact of the spread depends heavily on trading style.

  • Scalpers and day traders are highly sensitive to spread costs
  • Swing traders and position traders are less affected but still impacted

For short-term traders, even small spreads can materially reduce profitability. For longer-term traders, spread costs accumulate more slowly but still affect overall returns.

This is why professional traders evaluate execution costs alongside strategy performance.

Spread vs. commission-based pricing

Some brokers offer commission-based pricing with tighter raw spreads, while others include costs entirely within the spread.

Neither model is inherently better. What matters is:

  • Total transaction cost
  • Consistency of execution
  • Transparency

Professional traders focus on the all-in cost, not just headline spreads.

Common misconceptions about the spread

Several misconceptions persist among new traders:

  • A tighter spread always means better trading conditions
  • Spreads are controlled solely by brokers
  • The spread is insignificant for profitability

In reality, spreads reflect underlying market conditions and can meaningfully impact results, particularly in fast-moving or illiquid environments.

Practical implications for traders

Understanding the bid-ask spread leads to better decision-making:

  • Avoid trading during low-liquidity periods unless strategy-specific
  • Adjust position sizing around high-impact events
  • Align trading style with instruments that offer suitable execution costs

Spreads are not obstacles to overcome; they are signals about market quality.

Final thoughts

The bid-ask spread is one of the most fundamental elements of trading, yet it is often overlooked. It represents the cost of immediacy, the state of liquidity, and the balance between buyers and sellers.

Traders who understand spreads trade with clearer expectations, better execution, and fewer surprises.

In professional trading, costs matter. The spread is where those costs begin.


This analysis and any provided information can be used only for educational purposes. SharmaFX is not a professional financial institution nor provides any financial services. SharmaFX does not provide any financial advice, investment advice, or trading signals. SharmaFX is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.

Editors’ Picks

EUR/USD consolidates around 1.0900, bullish bias remains ahead of key US data

EUR/USD consolidates around 1.0900, bullish bias remains ahead of key US data

The EUR/USD pair is seen consolidating its strong gains registered over the past two days and oscillating in a narrow band during the Asian session on Tuesday. Spot prices currently trade around the 1.1900 mark, just below an over one-week high touched the previous day.

GBP/USD tilts bullish as markets barrel toward mid-week NFP print

GBP/USD tilts bullish as markets barrel toward mid-week NFP print

GBP/USD is holding a broader bullish structure on the daily chart, with price trading well above the 50 Exponential Moving Average at 1.3507 and the 200 EMA at 1.3310, confirming the intermediate uptrend that has been in place since the November 2025 low near 1.2300. 

USD/JPY stays defensive below 156.00 as focus shifts to US data

USD/JPY stays defensive below 156.00 as focus shifts to US data

USD/JPY stays on the back foot below 156.00 in the Asian session on Tuesday. The Japanese Yen holds the upper hand over the US Dollar after Japanese Prime Minister Sanae Takaichi led the ruling Liberal Democratic Party to a historic landslide win and on intervention talks. Traders brace for key US economic data that could offer more clues on the Federal Reserve's monetary policy.


Editors’ Picks

AUD/USD consolidates below 0.7100 on broad US Dollar weakness

AUD/USD consolidates below 0.7100 on broad US Dollar weakness

AUD/USD is consolidating below three-year highs of 0.7099 after a strong break above the 0.7000 psychological level for the first time since February 2023, supported by the Reserve Bank of Australia's hawkish monetary policy stance and broad-based US Dollar weakness. 

Gold retreats below $5,050 on profit-taking ahead of US data

Gold retreats below $5,050 on profit-taking ahead of US data

Gold price attracts some sellers in the Asian session on Tuesday, falling back below $5.050. The precious metal edges lower amid improved risk sentiment and some profit-taking. Traders look to the US Retail Sales data and Fedspeak due later in the day ahead of Wednesday's Nonfarm Payrolls release.  

USD/JPY stays defensive below 156.00 as focus shifts to US data

USD/JPY stays defensive below 156.00 as focus shifts to US data

USD/JPY stays on the back foot below 156.00 in the Asian session on Tuesday. The Japanese Yen holds the upper hand over the US Dollar after Japanese Prime Minister Sanae Takaichi led the ruling Liberal Democratic Party to a historic landslide win and on intervention talks. Traders brace for key US economic data that could offer more clues on the Federal Reserve's monetary policy.

Litecoin eyes $50 as heavy losses weigh on investors

Litecoin eyes $50 as heavy losses weigh on investors

Following a strong downtrend across the crypto market over the past week, Litecoin holders are under immense pressure. The Bitcoin fork has trimmed about $1.81 billion from its market capitalization since the beginning of the year, sending it below the top 20 cryptos by market cap.

The market is buying everything again but is it dancing on a borrowed floor

The market is buying everything again but is it dancing on a borrowed floor

The market has a short memory and a fast trigger finger. Last week’s liquidation barely cooled before risk came roaring back, pushing the S&P toward record territory and reinstalling Big Tech as the engine of choice. This is not discovery. It is re exposure.

RECOMMENDED LESSONS

5 Forex News Events You Need To Know

In the fast moving world of currency markets where huge moves can seemingly come from nowhere, it is extremely important for new traders to learn about the various economic indicators and forex news events and releases that shape the markets. Indeed, quickly getting a handle on which data to look out for, what it means, and how to trade it can see new traders quickly become far more profitable and sets up the road to long term success.

Top 10 Chart Patterns Every Trader Should Know

Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology

Best Brokers of 2025