In case you’ve ever entered into any trade only to see that you were already in deficit despite minimal changes in the market, you have experienced how powerful the spread concept was. As you can understand, this is a small issue that is overlooked by novice traders yet may affect their success in prop firm tasks considerably.
Here we will consider the topic from a practical angle to ensure you are able to use all the insights gained in trading activities.
First of All, What Is Spread in Forex?
Many people ask this question: what is a spread in trading?
The spread in forex refers to the difference between the buying and selling price of an asset. In other words, it is what you buy for and sell for.
Thus, if you make an exchange trade in some currency pair, you buy it at a price which is higher than the price at which you sell it back. This difference is the spread, which is also considered the trading fee.
Example:
- Bid (buy) EUR/USD: 1.1000
- Ask (sell) EUR/USD: 1.1002
In this case, the spread equals 2 pips.
Why Spread Matters More in Prop Firm Challenges
And now we’re talking about serious stuff.
In retail, spreads will influence your profitability. In a prop firm contest, on the other hand, they will determine your survival.
Typically, the following requirements must be met in a prop firm environment:
- Daily drawdown limitations
- Overall maximum loss
- Minimum number of trading days
- Required profit
A small difference in spread may cause your position to become unprofitable sooner than you anticipate. When risk restrictions are tight, this becomes critical.
For example, if your entry point is expected to yield 5 pips in the shortest time possible, and the spread is 2 pips wide, you have a 40% deficit compared to your expectation.
The Hidden Cost of Spread (That Most Traders Ignore)
Now, here is a point that many traders fail to grasp: spread impacts each and every transaction.
It is not just an issue of a one-off charge but rather a pattern in time.
For example, you make 5 transactions per day, with the average spread at 2 pips. You pay 10 pips daily in terms of spread. In a week, it will be 50 pips. And so forth.
When participating in the prop firm contest, where each pip counts towards the evaluation, the above figure becomes important.
Fixed vs Variable Spreads in Prop Firms
Not all spreads act in a similar manner. Prop firms generally have varying spreads, implying that they are not always fixed but fluctuating according to certain factors.
Varying Spreads
They narrow in times of high liquidity, and broaden during market volatility. Such a system is mostly practiced in prop trading.
Fixed Spreads
Though rare among prop firms, they are fixed in terms of price. They are generally predictable but higher compared to market spreads.
In actual prop trading environments, it is advisable to practice varying spreads since they represent true market spreads; however, they call for better timing skills.
When Spreads Get Dangerous
There are times when spreads tend to blow out—and if you are not careful, they will mess up your trade set-up.
1. News Announcements
An announcement, whether it’s an interest rate decision or NFP, can trigger spreads to become really wide in just a few seconds.
2. Open and Close of the Trading Session
This usually happens during the time between sessions.
3. Low Liquidity Times
Low liquidity times include late NY or early Asia hours.
During this challenge, it would be a bad idea to trade on these times without a proper game plan.
Mid-Article Reality Check
What is essential to remember is that understanding the spread in foreign exchange market is not only useful but also very practical. It has become common practice among traders to consider themselves invincible due to their trading strategy. Nevertheless, not considering such aspects as spread costs makes their performance very difficult.
In order to be successful at passing evaluation of the best prop firm, a trader should pay attention both to his trading style and timing.
Trading styles influence the impact of spread greatly.
Scalping
In terms of scalping, spread can have a significant impact. If your goal is to win money from price changes between 5 and 10 pips, 1–2 pip spread can significantly influence your profits.
Day Trading
Here it also plays a considerable role although not as significant as previously.
Swing Trading
It plays a lesser role since your objectives are higher.
Smart Ways to Handle Spread in a Prop Challenge
Well, then, what can you do about it?
Some advice for you:
Trade During Peaks
Trade during sessions when London and New York overlap, as spreads will be the smallest there.
Stay Away From News (Unless You’re Experienced)
Spreads tend to go wild due to unforeseen events. Unless you’re a news trader, it’s best not to participate.
Trade Major Currency Pairs
Currencies such as EUR/USD, GBP/USD, and USD/JPY typically have the smallest spreads.
Adjust Your Trading Style
When spreads are somewhat larger, consider raising your target or improving your entry point.
Pay Attention To Your Prop Firm’s Spreads
Firms offer varying spreads. Spend some time studying their behavior while evaluating them.
A Mistake That Costs Traders Their Challenge
One of the most frequent mistakes? Failing to take spread into account at all.
Trading algorithms may be backtested on ideal charts and will not consider the presence of other trading factors. When used in a prop firm test, traders find themselves unable to achieve the desired outcome.
The reason? The lack of consideration for spread, slippage, and execution costs.
For consistency, the trader must include spread as one of the components of the algorithm.
Final Thoughts
It might seem that the notion of spread plays a minor role in a prop firm challenge. Nevertheless, the difference between success and failure lies in the little things.
The study of the spread’s dynamics and its behavior can provide a trader with the edge over competitors. Not only does it allow for better timing, but it also prevents mistakes and saves funds.
In other words, spread is an important aspect of trading, especially when talking about passing prop firm challenges. It goes without saying that a trader should keep everything under control.
Pay attention to the spread from now on, and you’ll see immediate improvements in performance.
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