The spread is one of the most basic — and most important — concepts in forex trading. At its core, the spread is the difference between the price at which the market (or your broker) will buy a currency pair from you and the price at which it will sell the same pair to you. That small gap is effectively the built-in cost you pay when you open and close trades, and it influences how quickly a position needs to move in your favour before you break even.
Below I explain what the spread looks like on a price quote, how it’s measured, the main spread types you’ll encounter, how to convert spreads into real money, what moves spreads around, and practical ways traders try to manage spread costs. Trading carries risk — spreads are one of many costs that affect performance — and nothing here is personalised advice.
How spreads are quoted and measured
Every forex quote shows two prices: a bid and an ask. The bid is the price at which the market will buy the base currency (so you would sell at the bid). The ask (sometimes called the offer) is the price at which the market will sell the base currency (so you would buy at the ask). The spread equals ask minus bid.
Traders measure spreads in pips, the standard smallest price increment. For most currency pairs a pip is 0.0001; for pairs quoted in Japanese yen a pip is 0.01. So if EUR/USD is quoted as 1.1000/1.1002 the spread is 0.0002, which is 2 pips. If USD/JPY shows 109.75/109.77 the spread is 0.02 JPY, or 2 pips for a yen pair.
Because platform quotes often use more decimal places today (fractional pips, or “pipettes”), you’ll also see spreads expressed as 0.8 pips or 0.9 pips. The principle is the same: smaller numbers mean lower transaction cost.
Types of spreads you’ll encounter
Brokers and liquidity providers present spreads in a few common ways and choosing between them affects costs and execution.
Fixed spreads remain the same regardless of market conditions. Brokers often offer fixed spreads on simple accounts so traders know a predictable cost up front. The trade-off is that fixed spreads tend to be wider on average, and in fast-moving markets the broker may re-quote or refuse a trade rather than execute at the locked spread.
Variable (floating) spreads change with market liquidity and volatility. During the busiest hours for a currency pair, floating spreads can be very tight; during low-liquidity hours or around big news they widen. Many retail accounts use floating spreads.
Raw or ECN-style spreads are extremely tight because they show near interbank pricing. Brokers that offer raw spreads usually charge a separate commission per trade — so you pay a small commission plus a tiny spread instead of a larger built-in spread.
Finally, some brokers advertise “zero spread” accounts but then apply a higher commission or other fees. Always compare the total cost: spread plus commission and any other charges.
Calculating the spread cost — simple examples
Knowing the spread in pips is only part of the story. To convert it into dollars (or your account currency) you need the trade size.
For most retail traders a standard lot equals 100,000 units of the base currency. With EUR/USD a one-pip move on a standard lot is worth about $10. So if the spread is 2 pips the immediate cost on a 1‑lot trade is roughly $20 (2 pips × $10 per pip). On a mini lot (10,000 units) a one-pip move is about $1, so a 2‑pip spread would cost about $2.
Concrete example: you open a 1-standard-lot long position on EUR/USD at an ask of 1.1002 while the bid is 1.1000. You pay the ask to enter, so you start the trade at a 2‑pip loss. The market must move at least 2 pips higher just for you to reach breakeven (ignoring swaps, commissions and slippage).
For yen pairs, remember pips are larger numerically. If USD/JPY is quoted 109.75/109.77 (2 pips) and you trade one standard lot (100,000 USD), the pip value is roughly ¥1,000 and converted to your account currency depends on the exchange rate; the software on most platforms does this conversion for you.
What moves spreads — the main drivers
Spreads are not set in stone. Several forces cause them to tighten or widen.
- Market liquidity: Active, heavily traded pairs (EUR/USD, USD/JPY) usually have the tightest spreads because many participants are buying and selling. Less-liquid or exotic pairs have wider spreads.
- Volatility and news: Scheduled economic releases, central bank announcements, or unexpected geopolitical events can increase price uncertainty. Brokers widen spreads to manage execution risk.
- Trading hours and session overlap: When London and New York trading sessions overlap liquidity peaks and spreads tend to be narrow. During off-hours or holidays spreads often widen.
- Broker execution model and fees: Market-maker brokers may add a markup to spreads; ECN brokers display raw spreads but charge commissions.
- Order size and account tier: Very large orders and high-volume clients can get preferential pricing; retail accounts may see wider spreads than institutional volumes.
Understanding these drivers helps you anticipate when spreads are likely to be higher and plan trades around that behaviour.
Spreads and trading strategies
Spreads matter for every trading style but their impact differs by timeframe and frequency. For scalpers, who attempt to capture a few pips many times a day, spreads are a central cost: even a 1–2 pip difference can make the difference between profitable scalping and consistent losses. Scalpers often choose brokers with the tightest spreads and accept commission fees if the overall round-trip cost is lower.
Day traders also care about spreads, though slightly wider ones can be acceptable if trades aim for larger intraday moves. Swing traders and position traders are less sensitive to intraday spread changes because their profit targets are typically much bigger than a spread amount; nevertheless, large spread widening during entries or exits can still hurt returns.
Carry and interest-based strategies must take spreads into account because they reduce the net interest advantage captured over time. In short, match your spread expectations to your trading horizon: the shorter the horizon, the more critical low spreads become.
Execution, slippage and hidden costs
Spread is one visible cost, but execution quality and slippage are related issues that affect realized performance. Slippage occurs when an order executes at a worse price than requested, often during fast markets or when liquidity is thin. Market orders are more likely to experience slippage; limit orders can avoid paying a poor execution price but may not fill.
Re-quotes and delayed fills are other execution-related problems seen with some providers when spreads widen sharply. Always test order execution in a demo and monitor live conditions; the cheapest advertised spread is meaningless if execution is unreliable.
Practical steps to manage spread costs
There is no magic way to remove spread costs, but traders can reduce their impact with a few sensible practices. Trade the most liquid pairs if low spreads are important to you. Time trades to coincide with higher-liquidity sessions, especially the London–New York overlap for EUR/USD and USD-related pairs. Compare brokers using total cost metrics: average spread plus commissions over the pairs and times you trade, not only the headline “tightest spread” claim. Use limit orders when appropriate to avoid buying at the ask during a transient spike, and avoid entering or exiting around major news releases unless your strategy specifically accounts for volatile spreads and slippage.
If you’re evaluating account types, remember that zero-spread or raw-spread accounts often swap spread for commission; whether that is cheaper depends on your lot sizes and trade frequency.
Risks and caveats
Spreads are only one of several trading costs and risks. Wider-than-expected spreads can turn profitable-looking setups into losers, especially for short-term strategies. During major news or market shocks spreads may widen dramatically or liquidity may evaporate; stop-loss orders can be filled at much worse prices than intended. Fixed spread offers can seem attractive but may come with re-quotes or higher overall costs during stable market times. Conversely, ECN-style pricing with very tight spreads often pairs with commissions that matter for small, frequent trades.
All trading involves risk. Leverage can amplify both gains and losses, and past market behaviour does not guarantee future results. This article is educational and not personalised trading advice; consider testing ideas on a demo account and consult a qualified advisor if you need tailored guidance.
Key takeaways
- The spread is the difference between the bid and ask price; it’s the immediate transaction cost you pay when entering and exiting forex trades.
- Spreads are measured in pips and convert to real money depending on your trade size (lot size) and the currency pair.
- Spreads vary by market liquidity, volatility, session timing, and broker model; majors during overlap hours usually have the tightest spreads.
- Manage spread costs by choosing liquid pairs, trading during busy sessions, comparing total costs (spread + commission), and using appropriate order types.
Trading carries risk — never risk money you cannot afford to lose, and this information is not personalised financial advice.
References
- https://www.dukascopy.com/swiss/english/marketwatch/articles/forex-spread/
- https://www.tastyfx.com/news/what-is-the-spread-in-forex-and-how-do-you-calculate-it-201126/
- https://www.axiory.com/trading-resources/trading-terms/what-is-spread
- https://www.investopedia.com/ask/answers/06/forexpercentagespread.asp
- https://traders-academy.deriv.com/trading-guides/spreads-in-forex-and-what-influences-them
- https://capitalxtend.com/forex-academy/forex/what-is-spread-in-forex-trading