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Bid-Ask, Spreads, and Slippage

Pomegra Learn

Bid-Ask, Spreads, and Slippage

When you look at a currency quote, you see two prices: a bid and an ask. The difference between them—the spread—is the cost you pay to enter a trade. But that is only the beginning. Slippage, the difference between the price you expected and the price you actually received, is often far larger than the spread, especially during fast-moving markets. This chapter dissects the true cost of trading: why spreads exist, what causes them to widen, how slippage occurs, and how your broker's business model affects the prices you get. You will also learn about different order types and how to use them to minimize your execution costs.

By the end of this chapter, you will understand that a "2-pip spread" is not the whole story. You will see how liquidity varies across session times and pair selections, and how a 50:1 leveraged position amplifies the impact of a three-pip slip. Most importantly, you will recognize that every trade costs money before it even moves—your job is to make enough on the move to overcome that cost. This insight will transform how you think about trade selection and position sizing.

Why This Matters​

Many aspiring traders focus on finding a winning directional bias and overlook the costs that erode their edge. A trader who wins 60 percent of trades but loses 3 pips on each winner and gains only 4 pips per losing trade can still go broke. Conversely, a trader who understands spreads, slippage, and execution costs can build a strategy that accounts for them from the start. The difference between a 10-pip spread (typical in an exotic pair during low liquidity) and a 1-pip spread (typical in EUR/USD during London hours) is not trivial—it can be the difference between a profitable strategy and a losing one.

What You Will Learn​

This chapter explains the mechanics of the bid-ask spread: why market makers quote two prices, what causes spreads to widen during low-liquidity periods, and how to interpret a price quote. You will learn what slippage is, why it happens, and how it differs from the spread. The chapter then examines liquidity: how it varies by session, by pair, and by volatility, and how your broker's liquidity providers (or lack thereof) affect the prices you receive. The section on broker models contrasts market-maker brokers (who may have an incentive to work against you) with ECN and STP brokers (who pass trades to the market). You will learn about requotes and other tactics, and you will see how different order types (market, limit, stop-limit) let you choose your own tradeoff between certainty of execution and price certainty.

How to Read This Chapter​

Start with the bid-ask section; this is foundational and will frame everything that follows. Then move through the spreads and liquidity sections, which explain why and when spreads widen. The slippage section shows you the real-world cost of execution; it pairs well with the liquidity section. Once you understand how costs arise, move into the broker models section, which teaches you to think critically about who you are trading with and what incentives they have. The order types section is practical and should be read carefully, as it directly affects how you will execute trades. If you are a longer-term trader who does not obsess over intraday execution, skim the bid-ask mechanics and focus on the session liquidity and broker models sections.

The articles below will equip you to minimize the costs that eat into your profitability.

Articles in this chapter​