The spread is one of the most important costs in forex trading, yet many traders overlook it. Understanding how spreads work and how to minimize them can significantly impact your trading profitability. This guide explains everything you need to know about forex spreads.
What is the Spread in Forex?
The spread is the difference between the bid price (what buyers pay) and the ask price (what sellers receive) for a currency pair. It represents the cost of executing a trade and is how most forex brokers make money.
Key concept: Every time you enter a trade, you start at a small loss equal to the spread. If EUR/USD has a 1 pip spread, you need the price to move 1 pip in your favor just to break even. This is why tighter spreads mean lower trading costs.
Understanding Bid and Ask Prices
Every forex quote shows two prices:
Bid Price
The bid is the price at which you can sell the base currency. This is always the lower of the two prices.
Ask Price
The ask (or offer) is the price at which you can buy the base currency. This is always the higher of the two prices.
Example: EUR/USD Quote
Bid: 1.0850 | Ask: 1.0852
- Spread: 2 pips (1.0852 - 1.0850)
- If you buy EUR/USD, you pay 1.0852
- If you sell EUR/USD, you receive 1.0850
- Your cost for entering the trade is 2 pips
How Spread Affects Your Trading
The spread impacts your trading in several ways:
Immediate Cost
When you open a trade, you immediately face a loss equal to the spread. For example, with a 2 pip spread on EUR/USD (standard lot), you start the trade down $20.
Breakeven Point
The price must move in your favor by at least the spread amount before you start making profit.
Cumulative Impact
For active traders who make many trades, spread costs add up quickly. A day trader making 10 trades per day with a 2 pip spread pays 20 pips daily in spread costs.
Spread Cost Calculation
Trader making 200 trades per month:
- Average spread: 1.5 pips
- Trading 1 mini lot ($1 per pip)
- Monthly spread cost: 200 x 1.5 x $1 = $300
- Yearly spread cost: $3,600
This is $3,600 you need to make just to break even!
Types of Spreads
Forex brokers offer different spread types:
Fixed Spreads
Fixed spreads remain constant regardless of market conditions. They provide predictability but are typically wider than variable spreads during normal conditions.
- Advantage: Know exact costs before trading
- Advantage: No widening during news events
- Disadvantage: Usually wider than variable spreads
- Disadvantage: Less competitive pricing
Variable Spreads
Variable (or floating) spreads change based on market conditions, liquidity, and volatility. They can be very tight during normal trading but widen significantly during volatile periods.
- Advantage: Tighter spreads during normal conditions
- Advantage: More competitive pricing
- Disadvantage: Unpredictable during volatility
- Disadvantage: Can widen dramatically during news
What Affects Spread Size?
Several factors determine how wide or tight spreads are:
Currency Pair Liquidity
Major pairs like EUR/USD have the tightest spreads (0.1-1 pip) because they have the most trading volume. Exotic pairs can have spreads of 50-100 pips or more.
Market Volatility
During high volatility, spreads widen as brokers manage their risk. News announcements, economic data releases, and unexpected events cause spread widening.
Time of Day
Spreads are tightest during overlapping trading sessions when liquidity is highest. They widen during quiet periods like late Sunday evening.
Broker Type
- ECN brokers: Offer raw spreads from liquidity providers, often 0.0-0.3 pips, plus a commission
- STP brokers: Pass orders to liquidity providers with a markup
- Market makers: Set their own spreads, typically wider but no commission
Typical Spreads by Currency Pair
Here are average spreads under normal market conditions:
- EUR/USD: 0.1-1.5 pips
- GBP/USD: 0.5-2.0 pips
- USD/JPY: 0.3-1.5 pips
- USD/CHF: 0.5-2.0 pips
- AUD/USD: 0.5-1.5 pips
- EUR/GBP: 0.8-2.5 pips
- GBP/JPY: 1.5-4.0 pips
- USD/TRY: 20-100+ pips
Spreads vs Commissions
Some brokers charge commissions instead of (or in addition to) spreads:
Spread vs Commission Comparison
Broker A (Spread Only):
- EUR/USD spread: 1.5 pips
- Cost per standard lot: $15
Broker B (Raw Spread + Commission):
- EUR/USD spread: 0.2 pips ($2)
- Commission: $7 per lot
- Total cost per standard lot: $9
Broker B is cheaper despite charging commission!
When Spreads Widen
Be aware of these situations when spreads typically increase:
- Major news releases: NFP, interest rate decisions, GDP reports
- Market open/close: Especially Sunday evening and Friday afternoon
- Low liquidity periods: Holidays, overnight sessions
- Unexpected events: Geopolitical events, natural disasters
- Flash crashes: Sudden market dislocations
How to Minimize Spread Costs
Follow these tips to reduce your spread expenses:
- Trade major pairs: Stick to EUR/USD, GBP/USD, and other liquid pairs
- Trade during peak hours: London and New York sessions have tightest spreads
- Avoid news events: Do not enter trades immediately before or after major announcements
- Compare brokers: Shop around for competitive spreads
- Consider ECN brokers: Raw spreads plus commission can be cheaper
- Trade larger timeframes: Fewer trades mean less total spread cost
Track Your Spread Costs
Pro Trader Dashboard calculates your total spread and commission costs across all trades. See exactly how much spreads are costing you and which pairs offer the best value.
Summary
The spread is the primary cost of forex trading and represents the difference between buy and sell prices. Fixed spreads offer predictability while variable spreads offer tighter pricing during normal conditions. Major pairs have the tightest spreads, and spreads widen during volatile periods and low liquidity times. To minimize costs, trade liquid pairs during peak hours and compare broker pricing carefully. Understanding spreads is essential for calculating true trading costs and maintaining profitability.
Ready to learn more? Check out our guide on forex trading sessions or learn about currency pairs.