What Is the Spread in Forex Trading?

The spread in forex trading is the difference between the price at which you can buy a currency pair and the price at which you can sell it. It is the primary cost of trading for most retail forex traders and is built directly into the prices quoted by brokers.

Understanding how spreads work, what causes them to change, and how they affect the overall cost of trading is essential knowledge for anyone participating in the forex market.

The Bid Price and the Ask Price

Every forex quote consists of two prices: the bid and the ask.

The bid price is the price at which the market will buy the base currency from you, or equivalently, the price at which you can sell the pair. The ask price is the price at which the market will sell the base currency to you, or the price at which you can buy the pair.

The ask price is always higher than the bid price. The spread is the gap between them.

For example, if EUR/USD is quoted at 1.10005 bid and 1.10015 ask, the spread is 0.00010, which equals 1 pip. When you open a long position on EUR/USD, you buy at 1.10015. If you immediately close the position, you sell at 1.10005. The spread means you are already 1 pip, or $1.00 per mini lot, behind from the moment you enter the trade.

How Spreads Are Measured

Spreads in forex are typically measured in pips. A pip is the smallest standard unit of price movement for most currency pairs, represented by the fourth decimal place in pairs like EUR/USD or GBP/USD.

For currency pairs involving the Japanese yen, where prices are quoted to two decimal places rather than four, a pip is the second decimal place.

Spreads can also be expressed in fractional pips, sometimes called pipettes, which represent one tenth of a pip. A spread of 0.8 pips is common for major pairs during liquid trading hours.

Fixed vs Variable Spreads

Spreads in forex can be either fixed or variable, depending on the broker and account type.

A fixed spread stays the same regardless of market conditions. Whether the market is quiet or highly volatile, the spread remains constant. Fixed spreads provide predictability and are easier to factor into trading costs, but they are typically set at a higher level than the average variable spread to account for the periods of volatility the broker absorbs.

A variable spread, also called a floating spread, changes in real time based on market conditions. During liquid, active trading sessions the spread tends to be tightest. During low-liquidity periods, such as the hours between the close of the New York session and the open of the Asian session, or during major news events, variable spreads can widen significantly.

Most retail forex brokers offering ECN or raw spread accounts use variable spreads. Standard accounts at market maker brokers more commonly offer fixed or semi-fixed spreads.

What Causes Spreads to Change?

Variable spreads are influenced by several factors.

Liquidity is the primary driver. When more buyers and sellers are active in the market, competition between them tightens the spread. During the London and New York session overlap, which is the most liquid period of the forex trading day, spreads on major pairs are typically at their tightest. During the Asian session or outside normal trading hours, spreads are generally wider.

Volatility also affects spreads. Around major economic data releases, central bank decisions, or unexpected news events, liquidity providers widen their quotes to account for the increased uncertainty. This can cause spreads to spike dramatically for a brief period around the announcement.

The currency pair itself affects the typical spread level. Major pairs such as EUR/USD, GBP/USD, and USD/JPY are the most liquid and carry the tightest spreads. Minor and exotic pairs, which have lower trading volumes, carry wider spreads that reflect the reduced liquidity and higher cost of hedging for liquidity providers.

How Spreads Affect Trading Costs

The spread is effectively a cost that must be overcome before a trade becomes profitable. On every trade you open, you begin at a loss equal to the spread. The market must move in your favour by at least the spread amount before you break even.

For traders who hold positions for days or weeks, the spread is a relatively small proportion of the expected move. A 1 pip spread on a trade targeting 100 pips represents a 1% entry cost.

For scalpers and high-frequency traders who target very small moves, the spread is a much larger proportion of the expected profit. A 1 pip spread on a trade targeting 3 pips represents a 33% entry cost, making the choice of low-spread broker and account type critically important.

Understanding the spread in the context of your trading strategy and time horizon is therefore an important part of evaluating your overall trading costs.

Spreads and Commission

Some brokers, particularly those offering ECN or raw spread accounts, charge a separate commission per trade rather than building their revenue into the spread. On these accounts, the spread itself may be very tight, sometimes starting from zero pips, but a fixed commission is charged per lot traded.

The total cost of trading on a commission-plus-tight-spread account versus a no-commission-plus-wider-spread account depends on how frequently you trade and the size of your positions. Neither structure is universally cheaper. Evaluating the total cost, spread plus commission, for your typical trade size and frequency is the most accurate way to compare accounts.

Frequently Asked Questions

What is the spread in forex? The spread is the difference between the bid price and the ask price of a currency pair. It represents the cost of entering a trade and is the primary way brokers earn revenue on standard accounts. The spread must be overcome before a trade becomes profitable.

How is the spread calculated in forex? The spread is calculated by subtracting the bid price from the ask price. For example, if EUR/USD is quoted at 1.10005 bid and 1.10015 ask, the spread is 0.00010, which equals 1 pip.

What is a good spread in forex? For major pairs like EUR/USD during liquid trading hours, spreads of 0.5 to 1.5 pips are typical on standard accounts. On raw spread or ECN accounts, spreads can start from 0.0 pips with a separate commission. What constitutes a good spread depends on the pair, the account type, and the broker.

Why does the spread change? Variable spreads change based on liquidity and volatility conditions in the market. They are tightest during high-liquidity periods such as the London and New York session overlap, and they widen during low-liquidity hours or around major news events.

Does the spread cost you money in forex? Yes. Every time you open a trade, you begin at a loss equal to the spread. The market must move in your favour by at least the spread amount before you break even. Over a large number of trades, the cumulative cost of spreads is a significant factor in overall profitability.

Which currency pairs have the lowest spreads? Major currency pairs involving the US dollar, particularly EUR/USD, USD/JPY, and GBP/USD, typically carry the lowest spreads due to their high liquidity. Exotic pairs involving currencies from smaller economies carry the widest spreads.

What is the difference between a spread and a commission in forex? A spread is built into the quoted price and represents the gap between the buy and sell price. A commission is a separate charge applied per trade or per lot traded. Some brokers charge only a spread, some charge only a commission on very tight spreads, and some charge both. The total cost of trading is the sum of all charges regardless of how they are structured.