How Does Spread Affect Profit in Forex?

Every time you open a trade, you must always start with a loss (negative balance) which represents the spread.

This loss is artificial because it is put there by your forex broker as a means of them generating revenue from your trade.

So, the early stages of your trade is always spent trying to overcome the spread and become profitable.

If you exit your trade without overcoming the spread, you will be exiting with a loss which is already deducted from your account balance.

So, yes the spread affects the profit you would have made because it is deducted from your account balance at the beginning of every trade.

Some brokers who claim to offer low spreads end up increasing the spread after you enter a trade. They do it under the guise of market volatility and this is why you may see traders prefer to trade with high-spread brokers who are more transparent about the spreads.

Spreads actually eat into your profit because they are taken from your account equity and it don't matter whether your trade ends in a profit or loss; the broker must remove the spread from your account.

You must also learn to differentiate between minimum spread and average spread. The minimum or starting spread is almost never used by the broker and is more of a marketing strategy to lure customers.

If a broker says the spread on an account starts from 0.6 pips, don't expect to be charged that amount because you will definitely be charged higher.

To find out the true spread, select the instrument you want to trade and check for the average or typical spread figure. This is the true spread you will get 80% of the time.

Lets us look at an example with the broker Exness, when advertising their account types they say spreads on the Standard Account start from 0.2 pips but this is rarely the case.

When you go to the instrument list and view the average spreads for various instruments, you will see the spreads are higher.

Even when you are in the middle of an active trade, your broker can choose to widen the spread and this can cause your stop loss to be hit even without price reaching it. This means you are forced to exit the market prematurely at a loss. I experienced this a lot with Exness broker.

The spread is the difference between Bid & Ask price of an instrument. It automatically means that when you are buying, you pay higher than the current market price, and when selling you sell for lesser.

Buying for higher than the true price and selling for lesser, means that you make less profit than you should have if you bought & sold at the true market price.

The spread will always go to your broker as their fee but you should pay close attention to it because since most brokers offer variable or dynamic spreads, it means they can increase it at any time without notifying you.

The spreads don't necessarily affect profit & loss on an individual trade by that much, but over time it adds up, especially if you are overtrading.

For example:
For a single 1 lot EURUSD trade with a 0.7 pip spread, it calculated to be USD 7 per trade. It will be higher if the spread is high.

Now, if you place 100 such trades in a month (you are a really active trade who overtrades):
100 trades * USD 7 per trade = $700 total cost in spreads paid to your broker.

By comparison if the broker charges you 1.2 pips spread for same trading, you will be paying USD 1200 for the same trading to your broker.

This means that over the month, you would need to generate at least $700 in profits (or whatever the spreads are for calculation) just to break even on your trading account after the spread costs. Or even more if your broker charges you more. It is 70 pips on a 1 Standard lot size.

Overtrading can lead to really high transaction costs over time. And high spreads will only make it worse.

Just check your total volume traded last month, and you will get an idea of the costs.