BasicsInteractive

Spread

The gap between the bid and the ask — the built-in cost of entering a trade.

Also called: bid-ask spread · bid ask spread

In plain language

The spread is what you pay for immediacy. Buy at the ask, sell at the bid, and the difference is gone before the trade has done anything.

Highly liquid instruments have tight spreads — often a single cent on a large-cap stock. Thin instruments can have spreads of several percent, which quietly destroys short-term strategies.

Spreads widen when liquidity dries up: outside regular hours, around news, and in fast-moving markets. The same instrument can be cheap to trade at 11am and expensive at 4:01pm.

The formula

Spread

Ask − Bid

Spread %: (Ask − Bid) ÷ Ask × 100
Round-trip cost: Spread × Position Size

Worked through

A 0.2% spread against a 0.5% average winner

Average winning trade: +0.50%
Spread paid per round trip: 0.20%
Net per winner: +0.30%
Share of the edge lost: 40%

Two fifths of the strategy belongs to the spread. Not to a bad month, not to a mistake — to the mechanical cost of getting in at the ask and out at the bid, charged identically on every trade whether it wins or loses.

The ratio is what makes this decisive rather than annoying. A trader holding for 5% moves pays the same 0.2% and loses 4% of the edge; a scalper working 0.5% moves loses 40%. Same instrument, same cost, completely different business.

This is why spread — not commission, which is usually smaller — is the first thing to check before shortening a timeframe. Trading more often multiplies the tax while the edge per trade shrinks, and the two move in opposite directions faster than most people expect.

It also widens exactly when you need it not to. Quoted spreads are peacetime figures; during news, at the open, and in a fast market they can be several times as wide, which is when stop orders are filling.

Change the numbers

This is the concept as a working tool. Edit any field and watch what moves — that relationship is the thing worth remembering.

Try it yourself

Bid

Ask

Spread: $0.0400
Spread %: 0.08%
Cost To Enter: $8.00

You buy at the ask and sell at the bid, so this $0.0400 gap is gone before the trade does anything. On a target of a few percent, that matters.

Seen on a chart

You sell at the bid and buy at the ask. The gap between them is paid on every round trip, before the trade has done anything.

Why it matters

The spread is a fixed tax on every round trip. If your average winner is 0.5% and the spread is 0.2%, nearly half your edge is gone before commissions.