Understanding Forex Spread Explained

The spread is the difference between the buying and selling price of a currency pair. It's how most forex brokers make money and represents your primary trading cost. Understanding spreads helps you choose better brokers and trade more efficiently.

What is the Forex Spread?

Every currency pair has two prices:

• Bid Price: The price at which you can sell
• Ask Price: The price at which you can buy

The spread is the gap between these two prices.

Example for EUR/USD:

• Bid: 1.1000
• Ask: 1.1002
• Spread: 2 pips

When you open a trade, you immediately start at a small loss equal to the spread. You need the market to move in your favor by at least the spread amount to break even.

How Spread Affects Your Trading

Let's say you buy EUR/USD with a 2-pip spread:

1. You enter at the ask price: 1.1002
2. To close, you sell at the bid price
3. If the bid is still 1.1000, you've lost 2 pips
4. The price must rise 2 pips just to break even

This is why spread matters—it's a cost on every trade you make.

Types of Spreads

Fixed Spreads

Fixed spreads stay constant regardless of market conditions:

Pros:

• Predictable costs
• No surprises during volatile markets
• Easier to calculate risk

Cons:

• Usually wider than variable spreads
• May include requotes during volatility

Variable (Floating) Spreads

Variable spreads change based on market liquidity and volatility:

Pros:

• Often tighter during normal conditions
• More competitive pricing
• No requotes

Cons:

• Can widen significantly during news events
• Less predictable costs

What Affects Spread Size?

Several factors influence how wide or tight spreads are:

Currency Pair Liquidity: Major pairs like EUR/USD have tight spreads (1-2 pips). Exotic pairs can have spreads of 20+ pips.

Market Hours: Spreads are tighter during active sessions (London, New York overlap) and wider during quiet periods.

Economic News: Spreads widen before and during major news releases when volatility increases.

Broker Type: ECN brokers typically offer tighter spreads than market makers.

Typical Spreads by Pair Type

Calculating Spread Cost

To know your actual cost, multiply the spread by your position size:

Formula:

Spread Cost = Spread (pips) × Pip Value × Number of Lots

Example with 1 standard lot EUR/USD, 2-pip spread:

2 pips × $10/pip × 1 lot = $20 cost

For a mini lot (0.1 lots):

2 pips × $10/pip × 0.1 lots = $2 cost

How to Minimize Spread Costs

Trade Major Pairs: Stick to EUR/USD, GBP/USD, USD/JPY for the tightest spreads.

Trade During Active Hours: London and New York sessions offer the best liquidity.

Avoid News Releases: Spreads spike during major economic announcements.

Choose the Right Broker: Compare spreads across different brokers.

Consider Account Types: Some brokers offer raw spread accounts with commission instead.

Spread vs. Commission

Some brokers offer two pricing models:

Spread-Only Accounts:

• No separate commission
• Wider spreads (2-3 pips)
• Simpler cost calculation

Raw Spread + Commission:

• Very tight spreads (0.1-0.5 pips)
• Fixed commission per lot ($3-7)
• Often cheaper for active traders

Calculate total costs for your trading volume to determine which is better for you.

Key Takeaways

• Spread is the difference between bid and ask prices
• It's your primary trading cost in forex
• Major pairs have the tightest spreads
• Spreads widen during low liquidity and high volatility
• Compare total costs (spread + commission) when choosing a broker

What's Next?

Now that you understand spreads, learn about forex leverage and how it magnifies gains and losses alike.

This article is for educational purposes only and does not constitute financial advice.