Ignoring Spread Costs — Why It Happens & How to Stop

Ignoring Spread Costs: The Silent Profit Killer

You think you made 5 pips on a trade. Your broker’s spread cost you 2 pips. Your actual profit: 3 pips.

That’s 40% of your profit going to the broker.

Most traders don’t realize this. They focus on pips, not cost-adjusted pips. And that’s why they fail when they scale.

The Math: How Spreads Destroy Profitability

Example 1: The Scalper

Your setup: EUR/USD scalp, 10-pip target, 50-pip stop.

Your backtest: 60% win rate, 1:5 R:R (10 pips won, 50 pips lost when wrong).

Expected return: 60% × 10 pips + 40% × (-50 pips) = 6 pips - 20 pips = -14 pips per trade

Wait, that’s negative. Let me recalculate.

Actually: (60% × 10) - (40% × 50) = 6 - 20 = -14 pips

That setup loses. But let’s assume a better one:

Better setup: 60% win rate, 5-pip target, 20-pip stop. Expected return: (60% × 5) - (40% × 20) = 3 - 8 = -5 pips

Still losing.

Even better: 65% win rate, 8-pip target, 20-pip stop. Expected return: (65% × 8) - (35% × 20) = 5.2 - 7 = -1.8 pips

Still losing!

This is why most scalpers fail. The edge is thin, and spreads eat it.

But if you DON’T account for spread in your backtest:

Backtest assumption: 0.3 pip spread (unrealistic)

Expected return: (65% × 8) - (35% × 20) - (1 pip spread × 100 trades) = 5.2 - 7 - 1 = -2.8 pips

Now add realistic spread (2 pips):

Live reality: (65% × 8) - (35% × 20) - (2 pips × 100 trades) = 5.2 - 7 - 2 = -3.8 pips

You lose because you ignored spread cost in backtesting.

Example 2: The Swing Trader

You’re doing better because swing trading has longer holds, so spread cost is diluted.

Your setup: 45% win rate, 100-pip target, 80-pip stop.

Expected return per trade: (45% × 100) - (55% × 80) = 45 - 44 = +1 pip

With spread cost (2 pips): 45 - 44 - 2 = -1 pip

You’re break-even. Or losing.

The point: Spreads destroy thin edges. If your edge is only a few pips, spread is a huge portion of it.

Session-Specific Spreads: Where the Money Bleeds

Spreads vary wildly by time of day:

Session	EUR/USD	GBP/USD	Exotic
London (7am–12pm GMT)	0.5–1.0	1–1.5	2–3
New York (1pm–6pm GMT)	0.7–1.2	1.2–2	2.5–3.5
Asian (10pm–5am GMT)	1–2	2–4	3–5+
Off hours	2–5	3–6	5–10+

If you scalp during Asian session with 3-pip spreads instead of London with 0.5-pip spreads, you’re paying 5.5x more in spread cost.

Over 100 trades, that’s the difference between profit and loss.

The Backtest Trap

You backtest your strategy with:

• Best-case spreads: EUR/USD at 0.3 pips
• No commissions: Assuming $0 cost
• Perfect execution: No slippage, no requotes

Live reality:

• Realistic spreads: EUR/USD at 1–1.5 pips average (higher in news)
• Commissions: Some brokers charge per trade
• Slippage: Your market order fills 1–2 pips worse than quoted price

Backtest result: +2% per month

Live result: Break-even or -1% per month

This is spread cost (and slippage) killing your edge.

How to Account for Spread Costs

Method 1: Subtract Spread from Every Trade

When calculating profit:

Quoted profit = Exit price - Entry price

Real profit = Quoted profit - Spread

If you scalped 5 pips but paid 2 pips spread, your real profit is 3 pips.

Method 2: Include Spread in Position Sizing

If your stop loss is 50 pips and spread is 2 pips:

Risk = 50 pips + 2 pips = 52 pips

Size your position for 52 pips of risk, not 50. This prevents over-sizing.

Method 3: Trade High-Liquidity Sessions

The simple rule: Scalp during London and New York. Avoid Asian and off-hours.

Strategy	Best Time	Avoid
Scalp (2–5 pip targets)	London (0.5–1 pip spread)	Asian (3–5 pip spread)
Intraday (10–20 pips)	London, NY (normal spreads)	Off-hours (wide spreads)
Swing (50+ pips)	Anytime	News (temporary volatility)

Method 4: Backtest Realistically

Use actual spreads in your backtest:

• EUR/USD: 1–1.5 pips (not 0.3)
• GBP/USD: 1.5–2 pips (not 0.5)
• Exotics: 3–5 pips (not 1)

If your edge disappears with realistic spreads, it’s not a real edge.

The Journaling Solution

When you journal every trade, spread costs become visible.

Example journal entry:

Pair	Entry	Exit	Pips	Spread	Real Profit	Reason
EUR/USD	1.0900	1.0905	+5	1.5	3.5	MA cross
EUR/USD	1.0910	1.0905	-5	1.5	-6.5	Failed breakout

After 20 trades, you see the pattern: “Spread is costing me 1.5 pips per trade. That’s 30 pips per month out of my 100-pip expected profit. It’s huge.”

Visibility leads to action: Switch brokers, trade fewer but better-quality setups, or trade during lower-spread sessions.

Broker Comparison: Total Cost, Not Just Spreads

Broker A: 0.5 pip spread, $5 commission per trade

Broker B: 1.5 pip spread, $0 commission

Which is cheaper?

On a 50-pip winner:

• Broker A: 50 - 0.5 - 5 = 44.5 pips (costs 5.5 pips total)
• Broker B: 50 - 1.5 = 48.5 pips (costs 1.5 pips)

Broker B is cheaper despite higher spreads. Always calculate total cost.

The Real Cost of Ignoring Spread

Trader ignores spread for a year:

• Takes 1000 trades
• Average spread: 2 pips
• Total spread cost: 2000 pips
• At $10/pip: $20,000 lost to spreads

If you’re trading a $50K account, that’s 40% of returns going to spread cost.

That’s not acceptable.

The Rule That Changes Everything

New rule: “I will not take a trade if the potential profit is less than 3x the spread cost.”

If spread is 2 pips and your target is 5 pips, don’t take it. The risk/reward is 5 pips to 50+ pips (if you’re wrong), but the spread eats 40% of your win.

Not worth it.

Wait for setups where spread is 10%+ of your target, not 40%+.

Track your spread costs