If you have traded once in your life, you know all about meeting the spread. This little hidden expense can be easily overlooked, especially if you are trading in a prop firm account and every pip counts.
What makes it more challenging, however, is the fact that many traders understand what spread is in its basic definition, but struggle to calculate and comprehend the effect it will have on their trading performance. This guide aims to help you learn how to do just that.
What Is the Spread?
First things first – let's not get too technical.
The spread is the difference between the buying price and the selling price of a security. This is the amount earned by the broker and prop firm liquidity providers when dealing with securities.
To give an example:
- EUR/USD Bid: 1.1050
- EUR/USD Ask: 1.1052
Here, the spread is 2 pips.
Why Spread Matters More in Prop Firm Trading
Spreads matter when you trade with your own money. However, in the case of a forex funded account they become essential.
Why is that?
Well, because:
- There are always restrictions regarding drawdowns
- Profit objectives are set in many cases
- Strategies like scalping require precise trading
A little wider spread may result in:
- Making the stop loss work less effectively
- Slashing profits
- Making passing tougher than it should be
Thus, you won’t do without considering spreads.
Step-by-Step: How to Calculate Spread in Forex
Let's go through this process together so that you can easily calculate the spread on the fly.
Analyze Bid and Ask Rates
All you need to do is open your terminal (MT5) and observe two rates:
Bid (sell rate)
Ask (buy rate)
Example:
Bid: 1.2000
Ask: 1.2003
Calculate the Difference Between Bid Rate and Ask Rate
Now it is time to perform some math operations:
Spread = Ask rate – Bid rate
Therefore,
1.2003 – 1.2000 = 0.0003
Translate Into Pips
Since most currency pairs use the four-digit representation, we should convert the difference into pips.
Hence:
0.0003 = 3 pips
And it will be your spread.
Shortcuts for Faster Calculations (Mental Math)
It only takes practice to understand that you can quickly perform these calculations mentally without any effort.
Simply look at the last digits:
1.2000→ 1.2003 = 3 pips
1.1055→ 1.1057 = 2 pips
How Spread Shows Up in Your Trade
But there is one thing that most traders miss.
Suppose that you go long on EUR/USD at 1.2003 (ask).
As soon as you exit the trade, you are selling at the bid (1.2000).
In that case, it’s already minus 3 pips simply due to the difference between the two prices.
Which means that, in practice, the price should cover 3 pips to your advantage to be in profit.
Spread Calculation Example in a Real Trade
Let’s make it practical.
- Pair: GBP/USD
- Bid: 1.3050
- Ask: 1.3052
- Spread: 2 pips
You place a buy trade.
If price moves to:
- Bid: 1.3054
- Ask: 1.3056
Now your position closes at 1.3054, giving you:
- Entry: 1.3052
- Exit: 1.3054
- Profit: 2 pips
Even though the market moved 4 pips, you only captured 2. The spread took the rest.
Fixed vs Variable Spreads (Important for Prop Traders)
But that is not the case with all spreads.
Fixed Spread
Consistent spread (e.g., always 2 pips)
More predictable
Better suited for novices
Variable Spread
Determined by market situation
Can be extremely low in calm times
Can become extremely high with volatility
Professional firms mostly use variable spreads, meaning you must be ready for anything, especially when important news is coming out.
The Role of Spread in Strategy Performance
This is where the action happens.
Scalping
When your target is 5-10 pips per trade, 2-3 pip spread is big. It will take away 30%-50% of your profits.
Day Trading
Spread will be important, but a little more wiggle room.
Swing Trading
Spread will become less of an issue since you aim to capture larger price movements.
So you need to always fit your strategy to the spread conditions you trade in.
An Underutilized Tip Every Trader Should Know About
Monitor the spread at different times of the day.
The spread usually:
Narrows in London & New York time zones
Expands in low liquidity periods
Peaks on news events
In prop firm competitions, just timing alone will make a difference.
Where This Fits In: The Bigger Picture
Every trader at one point in time searches online “How to Calculate Spread in Forex,” but the true key lies in its implementation within trading.
In a Forex Funded Account, you won’t just be calculating spreads; you’ll need to factor them into:
- Position sizing
- Stop-loss placement
- Risk/Reward ratio
This is what differentiates recreational traders from professional ones.
Mistakes to Avoid
Let’s skip the heartache.
Not Factoring Spread in Risk Management
Your stop-loss must factor in spread, not only price points.
Trading under High Spread Levels
News announcements could cause a spike in spreads, even reaching up to 5–10 times the norm.
Trading Small Moves Under High Spread Levels
If your target is too small, spread could stealthily eat away at your balance.
Final Thoughts
Spread calculations are simple enough; however, respecting them is where the average trader fails.
In prop trading, the objective is to operate with maximum efficiency. Any inefficiency, even such minor as not considering a 2-pip spread, can easily lead to failure or prevent an account from growing further.
This means that when placing the next trade, besides paying attention to the direction, you should always be aware of the entry costs.
After all, in the forex world, the journey is always more important than the destination.
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