Definition of spread assumptions
Spread assumptions are explicit guesses about the bid-ask spread you will face when trading a forex instrument. The bid-ask spread is the difference between the price you can sell at (bid) and the price you can buy at (ask). In calculations—such as cost estimates, profitability models, or backtests—spread assumptions provide a numerical input for the transaction cost created by entering and exiting trades.
A key idea is that spread assumptions are not the actual future spread. They are a modelling choice: you set a value (or a rule for how the value changes) and then compute results using that value.
How spread assumptions work in forex
In practical terms, spread assumptions determine the size of the “immediate cost” at trade entry (and often again at exit). If you assume a tighter spread than what you really get, the model will usually understate costs and can make performance look better than it would be in live execution. If you assume a wider spread, the model typically overstates costs.
To apply spread assumptions correctly, you must state what they cover:
- Which spread measure you are assuming (for example, a fixed spread value, an average, or a range).
- When the spread applies (entry only, entry plus exit, or additional trading activity).
- How the spread is treated during time (constant, time-of-day dependent, or varying across scenarios).
Because market liquidity changes, many models use assumptions about variability rather than a single number. Even then, you still need to define the assumption clearly, because different choices produce different break-even behavior.
Example of why assumptions matter
Imagine a simple calculation where you assume a fixed spread for a round trip (buy then sell). You can represent total transaction cost as “spread-related cost” plus any other execution-related costs you include or exclude. If your assumption is too optimistic, your computed net result may cross a threshold you would not reach after using the real spread.
This is why spread assumptions must be stated for every example. A result that is “good” under one assumed spread can become “bad” under a slightly wider assumed spread. The difference is not necessarily a flaw in the mechanics—it is a mismatch between assumptions and execution reality.
Material limitations and common failure modes
Spread assumptions have at least one important limitation: they can fail to represent how spreads behave in your specific conditions. Common failure modes include:
- Single-spread oversimplification: Using one constant spread ignores that spreads can widen during lower liquidity or higher uncertainty periods.
- Hidden execution details: Real outcomes depend on execution quality and whether the assumed pricing matches the actual order fill behavior.
- Inconsistent treatment of costs: Some models include spreads but omit other related costs (for example, commissions or fees). If you mix approaches, comparisons become unreliable.
- Lookback bias: Historical relationships between “market state” and spread do not guarantee future behavior.
Verification: how to check your spread assumptions
You can verify spread assumptions without relying on live data by checking sensitivity. The idea is to run the same calculation multiple times while varying the spread assumption within a realistic range (wider and tighter). If results change dramatically, then conclusions are highly dependent on the spread assumption.
A second verification step is assumption transparency: confirm that the spread you assumed matches the timing you model (entry and exit) and that you use a consistent definition of spread throughout the calculation.
If you cannot clearly state the assumption, the calculation is harder to reproduce and easier to misunderstand.
Next question to ask
To make spread assumptions more defensible, ask: What bid-ask spread definition and timing did my calculation use, and how sensitive are results to wider-than-assumed spreads?