Direct answer
A worked example of variable spread shows how the spread (the difference between the buy and sell price) can change between the time you place an order and the time it is executed. Because the spread may widen or tighten, the transaction cost is not a single fixed number. Instead, it depends on the spread that applies at execution.
Mechanism or definition
Variable spread means the spread is not guaranteed to stay constant. It can change with market conditions such as volatility and liquidity. Two mechanics stay conceptually stable:
- Spread defines the immediate price difference. If the instrument’s ask is higher than its bid, the spread is that gap.
- Cost is realized at execution. Your buy and sell prices (or at least the bid/ask used for entry and exit) determine the immediate spread-based component of cost.
To keep a worked example independently checkable, we must separate:
- Stable mechanics (assumptions): how spread translates into cost.
- Variable conditions (uncertainty): what spread happens at the moments orders are filled.
Worked example (scenario with every assumption)
Assumptions (stated up front):
- Instrument: a generic currency pair (no live pricing).
- Direction: you open a buy position and later close it with a sell.
- Contract size: 10,000 units (the common “one standard lot” convention in forex examples).
- Pip value: assume $1 per pip for 10,000 units (a simplifying assumption to avoid instrument-specific calculations).
- Orders: market orders execute immediately at the prevailing bid/ask. (No partial fills.)
- Fees/commissions: assume $0, so spread is the only immediate cost component.
- Spread at entry is variable; spread at exit may differ.
Step 1: Choose entry and exit spreads. Let’s create a scenario:
- Entry moment spread = 2 pips.
- Exit moment spread = 4 pips.
Step 2: Convert spread to cost. For a buy-to-close trade, the spread-based “round-trip” cost is often represented as the sum of the effective spread effects at entry and exit. With the simplified pip-value assumption, we can compute an approximate cost:
- Entry spread component: 2 pips × $1/pip = $2.
- Exit spread component: 4 pips × $1/pip = $4.
- Total spread-based cost (approximation): $2 + $4 = $6.
Step 3: Compare to a fixed-spread intuition. If someone incorrectly assumed the spread would be fixed at 2 pips for both entry and exit, they would compute:
- Fixed assumption cost: 2 pips + 2 pips = 4 pips × $1/pip = $4.
Result of the worked example:
- Variable spread scenario cost ≈ $6.
- Fixed-spread assumption cost ≈ $4.
- Difference ≈ $2, caused here only by the spread widening at exit.
Limitations and risks (material failure modes)
Even a clear numerical example cannot fully predict real outcomes because variable spread is influenced by factors that can fail your assumptions:
- Execution timing matters. If spreads change between order placement and fill, the realized spread can differ from what you observed moments earlier.
- Volatility and liquidity can increase variability. Periods of rapid price movement or thin liquidity can cause spreads to widen, increasing cost.
- Order execution details can differ from the assumption. Partial fills, re-quotes, slippage, or execution policies can change the effective bid/ask used, so “spread-only” cost may be incomplete.
- Other costs may exist. Even if spread is the focus, commissions, swaps/rollover, or other charges (depending on the trading setup and jurisdiction) can add to total cost.
Verification and next question
To verify the concept yourself, you can reproduce the arithmetic using your own assumptions about contract size, pip value, and the spread at entry vs. spread at exit you observe (from the platform’s execution details, not from a past average). A useful next question is: How are the bid and ask used for your specific order types, and does the platform report the executed spread or only prices?
If you want, you can share your assumed contract size and pip value rules, and I can format the same worked example using those exact inputs—without relying on any live market data.