When the spread eats the risk budget
Posted: Sat Oct 31, 2026 9:04 pm
Suppose each trade risks 10 dollars. A spread of 1 pip on a 5 pip stop uses a fifth of that budget before price moves at all.
On tighter stops, the share is bigger. A 3 pip stop with a 1 pip spread means a third of the risk is already spent. The trade starts with a handicap that no setup can fully overcome.
This is why the spread-to-stop ratio is a useful filter. Setting a maximum, say 20 percent, rejects trades where the cost is too large relative to the risk.
It also explains why some setups work at one time of day and not at another. The same pattern with the same stop distance has very different economics when the spread doubles.
For automated systems, adding a spread filter is trivial. For manual traders, a glance at the spread before entry, with a clear threshold, does the job.
The filter will cut some trades, but those tend to be the poorest ones anyway.
What is the maximum acceptable spread relative to the stop, and how was it determined?
On tighter stops, the share is bigger. A 3 pip stop with a 1 pip spread means a third of the risk is already spent. The trade starts with a handicap that no setup can fully overcome.
This is why the spread-to-stop ratio is a useful filter. Setting a maximum, say 20 percent, rejects trades where the cost is too large relative to the risk.
It also explains why some setups work at one time of day and not at another. The same pattern with the same stop distance has very different economics when the spread doubles.
For automated systems, adding a spread filter is trivial. For manual traders, a glance at the spread before entry, with a clear threshold, does the job.
The filter will cut some trades, but those tend to be the poorest ones anyway.
What is the maximum acceptable spread relative to the stop, and how was it determined?