What Are Spreads in CFD Trading?

In simple terms, the spread is the difference between the price at which you can buy a CFD (ask price) and the price at which you can sell it (bid price). This difference represents the broker’s profit and is a cost that you incur when you enter and exit trades.

For example, if a CFD for a stock is quoted at €100/€101, the spread is €1. When you enter a trade in Share CFD trading, you’ll automatically start with a €1 loss per unit because you’ll have bought at a slightly higher price (ask price) than the current market price (bid price).

Types of Spreads

Share CFD trading typically involves two types of spreads:

1. Fixed Spreads: Fixed spreads remain constant, regardless of market conditions. They provide certainty in trading costs, allowing you to know exactly what the cost will be before entering a trade. Fixed spreads are common in more liquid assets, such as major currency pairs, but may be less available in volatile markets.
2. Variable (Floating) Spreads: Variable spreads fluctuate based on market volatility, liquidity, and trading volume. In calm markets, variable spreads are often narrow, but during high volatility, spreads can widen significantly. Variable spreads are commonly used in highly volatile markets like commodities, stocks, and cryptocurrencies.

Why Are Spreads Important?

Spreads are essentially the cost of trading, and they directly impact your profitability. Here’s how:

1. Affecting Entry and Exit Points

When you enter a CFD trade, the spread places you in a small initial loss. For example, if the spread on a CFD is €1, you’ll start €1 “in the red” per unit as soon as you buy. To break even, the asset’s price needs to move by at least the spread amount in your favor. The larger the spread, the greater the price movement required to reach profitability.

2. Influencing Short-Term and High-Frequency Trading

For traders who make multiple trades within a day (scalpers or day traders), spreads can add up quickly. Each trade incurs the spread cost, so high-frequency traders need to ensure that their trades generate sufficient profit to cover these expenses. Tight spreads are generally preferable for short-term traders, as they minimize the cost impact on each trade.

3. Impacting Volatile Market Trades

In volatile markets, spreads can widen significantly, increasing the cost of each trade. When spreads widen, the break-even point moves further away, making it harder to achieve profitability, especially on short-term trades. For this reason, traders often monitor market conditions closely and adjust their strategies when spreads widen.

Strategies to Minimize Spread Costs

While spreads are an unavoidable cost, there are ways to manage and minimize their impact:

Trade During High-Liquidity Times – For assets with variable spreads, trading during high-liquidity times, such as the overlap between major trading sessions, can help you find tighter spreads.

Focus on Major Assets with Narrow Spreads – By focusing on these assets, you can reduce the spread cost and improve your chances of profitability, especially if you’re trading with a short-term strategy.

Monitor Market News and Events – Economic announcements, earnings reports, and geopolitical events can trigger volatility, often leading to spread widening. Monitoring economic calendars and trading around high-impact news events can help you avoid paying higher spreads during volatile times.

Choose the Right Broker and Account Type – Some brokers offer different account types with varying spreads and commission structures. Reviewing and selecting the account type that best aligns with your trading style can help you manage spread costs effectively.

Optimize Trade Size and Frequency – If spreads are high, consider adjusting your trade size or reducing the frequency of your trades. By focusing on fewer, higher-quality trades, you can avoid repeatedly incurring spread costs. In Share CFD trading, understanding spreads is key to managing trading costs and improving profitability. Spreads directly impact your entry and exit points, meaning that careful attention to spread sizes and market conditions is essential. By trading during high-liquidity times, focusing on assets with narrower spreads, and choosing the right broker, you can minimize the impact of spreads and make more informed trading decisions.