What is Spread?
The difference between the Bid and Ask prices is the ‘Spread’, which is what you pay to the broker in return for placing the order through them.
Therefore, you will notice that trades start in a minus figure, as you need to cover the spread before you begin make profit.
Let’s demonstrate this using an example. You buy 1 lot of EURUSD at $1.0700 the bid and ask prices were $1.0698 and $1.0700. When you buy, you get the Ask price. The price moves in your favour by 5 pips making the new Bid and Ask prices $1.0703 and $1.0705. You close the trade by selling at the new Bid price of $1.0703, making 3 pips profit which equals $300.
The reason that in this example your profit is less by $200, is due to the fact that you have been charged a 2pips spread.
Let’s take another example using GOLD, which is denominated in USD. You decide to Sell (short) 100oz (1 lot) when the bid and ask prices were 1600.50 and 1601.00. As this is a sell position, it is opened at the Bid price of 1600.50. The price then moves down in your favour by 0.50, making the new bid and ask prices 1600.00 and 1600.50. You close the trade by buying at the new Ask price of 1600.50.
In this case, even though the price moved in your direction, you were charged the spread and your order was opened and closed at the exact same price (1600.50), meaning that your Profit or Loss is equal to 0.
Spreads are typically floating and fluctuate depending on liquidity and volatility. Volatility is affected by Liquidity and vice-versa.