Spread
At any moment a broker quotes two prices: the bid (what you can sell at) and the ask (what you can buy at). The gap is the spread. Every position starts underwater by the spread, which makes it the most reliable cost in trading — charged on every single trade.
Spreads widen when liquidity is thin: around major news, at session rollover, on holidays. Strategies with small profit targets are disproportionately sensitive to spread, which is why realistic spread assumptions matter so much in backtests.
Covered in depth in Lesson 12: A-book, B-book: what your broker does with your order.
Related terms
- Slippage — The difference between the price an order requested and the price it actually filled at.
- Commission — A fixed per-trade fee some brokers charge instead of (or on top of) a wider spread.
- Liquidity — How much volume the market can absorb at current prices — the depth that determines spreads and slippage.
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