What is spread and why is it important in trading

Spread is a fundamental but extremely important concept that every trader needs to understand. To simplify, the spread is the difference between the highest price a buyer is willing to pay (bid price) and the lowest price a seller is willing to accept (ask price).

Basic Concept: Spread is the price difference

Imagine you are participating in a trading session in the market. At this moment, one trader says, “I want to buy at $100,” while another says, “I will only sell at $102.” The $2 gap between these two prices is the spread.

Spreads exist everywhere in financial markets—from stocks, forex, to cryptocurrencies. It is the natural gap between what buyers are willing to pay and what sellers are willing to accept.

How does the spread affect market liquidity?

The size of the spread directly reflects the liquidity of an asset. When the spread is small, it means there are many buyers and sellers, creating a good balance in the market. Transactions happen quickly and more easily, and you won’t lose too much when entering or exiting a position.

Conversely, when the spread is wide, it indicates a lack of buyers or sellers in the market. This can lead to sharp price volatility and make it difficult to find trading partners at fair prices.

Spread in different markets

The size of the spread is not always the same. In major stock markets or main forex pairs, spreads are usually quite narrow due to high trading volume. However, in the cryptocurrency market, especially for less liquid coins, spreads can be significantly wider.

For example, a coin like XRP with high trading volume typically has a small spread, helping traders enter and exit positions without significant losses. But for newer coins with less interest, a wide spread can have a considerable impact.

How does the spread affect your trading costs?

An important thing to remember: every time you trade, the spread is an hidden cost you pay. If you buy at $100 (ask) but sell at $98 (bid), even if the price doesn’t change, you’ve already lost $2 just because of the spread.

Exchanges, market makers, and service providers profit from this spread. That’s why choosing a market with a narrow spread is crucial to optimize your trading profits.

Understanding the spread will help you make smarter trading decisions and manage your costs more effectively.