Surely, those who have ever failed their prop firm challenge narrowly know how cutthroat such tasks are. One or two losses/ bad trades would ruin weeks of steady earnings.
Here comes the point most people don’t realize: Sometimes the issue might not be the method of trading but rather a high spread.
Yes, that small number between the bid and ask price could be the determining moment when it comes to evaluating your performance. That is why smart funded traders never overlook the significance of narrow spreads.
So, why is the low spread so crucial when it comes to funded trading?
The Truth Behind Prop Firm Evaluation
Prop trading challenges are all about being profitable and, more importantly, precise, consistent, and rigid.
There are certain standards one needs to follow for getting evaluated, including:
- Required profit percentages (8-10%)
- Maximum allowed drawdown daily
- Maximum overall drawdown
- And there is always a limit to time
It seems like quite an amount of things to comply with. However, it gets even more complicated when taking into consideration trading costs.
A Quick Refresher on Spreads
People mostly don’t even know What is a spread in trading.
To be clear about it, the spread is simply the difference between the bid and the asking price. This is the amount you have to pay for each trade that you open.
Many traders learn about spread meaning in trading and leave it at that but with prop trading, it isn’t enough to simply know the meaning of the spread. Understanding how it affects all your decisions is key.
And the reason behind this is simple – every pip is valuable if you’re getting evaluated.
Why Low Spreads Are an Advantage
Let’s start right off by saying low spreads equal low friction.
With trading, this translates into lower barriers, easier execution, and more opportunities.
This can be seen in practice through the following examples:
Better Trade Entries
You get closer to the true price with low spreads.
This leads to:
- Smaller drawdown
- Faster progression into the profit zone
- Better fill accuracy
In contrast, high spreads increase your entry level, making it necessary for the market to make larger movements for breakeven.
Better Risk/Reward Ratios
The essence of a prop trading test lies in risk management.
For instance, assume that you target a risk/reward ratio of 1/2.
With a high spread, it will eat into the reward side while boosting the risk. This can distort your entire trading strategy after some time.
Having a low spread is crucial for maintaining an ideal risk/reward ratio.
Reduced Stop-Outs
This is arguably the most damaging effect of a high spread.
For instance, imagine having made the perfect trade setup. Your analysis is on point. The price makes the expected move, but not fast enough to realize profits.
What happens then?
Your stop loss gets triggered.
Why?
Because of either a widening spread or the intrinsic high spread of the instrument itself.
Lower Overall Trading Costs
It may seem like common sense, but it is often overlooked.
There is a cost associated with every trade you make. Tighter spreads lead to:
- Higher profits
- Lower risks of overtrading
- Greater consistency
In order to meet an objective while maintaining strict risk guidelines, every single pip saves matters.
Compounding (What All Traders Overlook)
This is when it gets exciting.
Assume that you have:
- 50 trades during your assessment period
- An average spread of 2 pips
- This means that you pay 100 pips in trading costs.
If you cut down on these costs by half a pip:
You save yourself 50 pips without having to do anything else.
These 50 pips could mean success or failure in your assessment.
This is what makes successful traders who seek out the best prop firm think differently from others.
Low Spreads vs Market Conditions
Okay, but now let’s be honest with ourselves.
You will not always have low spreads.
That depends on:
- Liquidity
- Time of the day/session
- Volatility
- Infrastructure of your broker/prop firm
However, experienced traders know how to anticipate lower spreads and adjust accordingly.
Spreads Are Typically Lower When…
If you wish to have lower spreads, concentrate on:
- London session
- New York session
- Session overlaps (London-New York)
Since these sessions offer maximum liquidity, you’ll get low spreads automatically.
When You Need to Pay Attention
Spreads usually become higher when:
- Important news release
- Open/Close of the market
- Low liquidity (late Asian session for instance)
This means that you should avoid such situations because even profitable positions might become extremely risky.
Strategy Matters—But Costs Matter Too
Many traders fixate on their trading strategies:
- Indicators
- Price action
- “Smart money” concepts
Each critical, there’s no denying.
However, one crucial point: even the best strategy suffers from high trading costs.
Spreads may not directly impact profitability, yet they provide your strategy with the necessary margin to function correctly.
Shifting Perspective to Efficiency
Rather than asking:
“How do I discover the best strategy?”
Start pondering:
“Do I create an optimal environment for my existing strategy to work?”
Often, achieving better results isn’t about modifying your approach—sometimes, minimizing external resistance is all it takes.
And spreads play a pivotal role in this process.
Conclusion
Earning a passing grade at a prop firm requires not only correctness but efficiency.
Low spreads allow you to:
- Execute orders more precisely
- Control risks efficiently
- Retain profits
- Comply with tight evaluation criteria
It may not be much when considered in isolation, but in the challenging world of prop trading, such minor aspects become paramount.
So the next time you face a demanding test, remember to evaluate your trading environment as well.
It’s not always about finding new solutions; sometimes, the answer lies in making old strategies easier to implement by lowering trading costs.