If you are new to the financial trading industry, especially contracts for difference (CFDs), you are sure to quickly notice that the term "spread" is bandied around quite often. While it may sound like another one of the many financial jargons, rest assured that it is one of the most important factors that affect your profitability and success at prop firms. It is important that we understand what exactly a spread is and how it affects your trading costs and the right CFD broker, not only from an educational point of view but also because we can save ourselves some cash in the process.
What Exactly Is a Spread in Trading?
In essence, the spread is the difference between the buying price (the ask) and the selling price (the bid) of an asset. This works for all markets, including Forex, Indices, Commodities, and Stocks, as long as we are talking about CFDs.
In essence, it is the fee charged by the broker. It does not matter if the broker does not charge a direct commission, as they are earning money on the spread.
For example:
Bid on the Gold CFD: $1,995
Ask on the Gold CFD: $1,998
Spread = $1,998 – $1,995 = $3
This $3 is the cost of entering the trade instantly. The market has to move at least this amount in our favor before we can start making money on it.
Why Spreads Matter in Prop Firm or Professional Trading
The conditions for Prop Firm Traders are:
Limited drawdown
Required profit targets
Time-bound evaluation periods
Every single pip, point, or dollar counts. The wider the spread, the less your actual profits and more complicated your risk management becomes.
For example, suppose you're taking part in a Prop Firm Challenge with an account of 10,000 USD. Suppose your cost of an average spread per trade is $15. And suppose you make 20 trades per day. That’s $300 spent on spreads for that week-long challenge.
How to Calculate Spread
Knowing how to calculate spread in forex is not difficult, it just requires attention.
Formula:
Spread = Ask – Bid
Spread in Pips (for Forex or CFD-based currencies)
Four-figure pricing: Spread x 10,000
For JPY-based currencies: Spread x 100
For EUR/USD:
Bid: 1.1050
Ask: 1.1053
Spread = 0.0003 x 10,000 = 3 pips
Spread Cost in Money
You may also express the cost of the spread in terms of the actual costs incurred in trading:
Spread Cost = Spread x Pip/Point Value x Lot Size
For example, if you trade 1 standard lot of EUR/USD with a 3-pip spread, the actual costs incurred in trading would be:
3 pips x $10 = $30 per trade
By understanding this, you would be able to adjust your trading lot size, risk, and precision accordingly.
The Best CFD Broker: Why Choice Matters
choosing the best CFD broker involves more than simply their customer service and user interface. Your trading success is mostly dependent on the spread and execution speed.
The significance of choosing a CFD broker
Spreads
You can save money on every trade when you deal with brokers who have low spreads.
Implementation
Poor execution speed might result in slippage, which effectively increases your spread even with smaller spreads.
Spread vs. Commission
Some brokers may offer a minimal spread with no cost, while others may charge a commission on every deal instead of a spread. Knowing your expenses is crucial.
Liquidity Providers
Brokers that are connected to various liquidity sources mean that they can provide better execution with less slippage, which is essential if you’re a high-frequency trader or a prop firm.
Popular Assets and Their Typical Spreads
While spreads differ based on brokers and market conditions, here’s a rough idea of what you can expect:
Major Forex Pairs (EUR/USD, USD/JPY): 0.5 to 2 pips
Indices (S&P500, FTSE100): 0.5 to 2 points
Commodities (Gold, Oil): 0.3 to 3 points/dollars
Exotic Forex Pairs: 5 to 15 pips
By choosing to trade assets with naturally tight spreads, you can save on costs, especially if you’re a high-frequency trader.
Practical Tips to Reduce Trading Costs
While no brokerage firm can promise you zero spreads, you can still control them to some extent:
Trade during high-liquidity hours – The overlap of London and New York sessions usually offers the tightest spreads.
Trade major pairs or popular CFDs – Less popular assets usually carry wider spreads.
Steer clear of news events – Market volatility causes spreads to widen, sometimes by a huge margin.
Compare brokers based on total cost – While spreads are important, you should consider other costs as well, such as commission, overnight fees, and platform fees.
Use limit orders – While you may need to use market orders during times of high volatility, you should try to use limit orders instead.
How Broker Choice Affects Performance
The difference in the spreads of a tight-spread broker and that of a broker with higher spreads is not just in terms of cents, but it also includes:
- Risk/Reward Ratio
- Position Sizing
- Frequency of Trades
- Viability of the Trade Strategy
- Profit Potential
For prop firm traders, it is also very important as an improperly calculated spread may turn an otherwise profitable trade into an unprofitable trade, hence impacting the success of the challenge.
Some traders even go to the extent of creating a spreadsheet to calculate the costs incurred per trade in terms of spreads, in order to maximize the efficiency of the broker and the trading hours.