What Is the Forex Spread?

Have you ever noticed that the very second you open a trade, you’re already losing money? You click 'Buy' on EUR/USD, and your P/L immediately shows a negative balance. No, your broker isn't glitching, and the market isn't out to get you (at least, not in this specific way). You’ve just paid the 'entry fee' of the financial markets: the spread.

For intermediate traders, the spread is no longer just a definition in a glossary—it’s a critical variable in your risk-to-reward equations. If you’re scalping for 10 pips but paying a 2-pip spread, you’re essentially starting every race 20% behind the finish line. Understanding the mechanics of the spread is the difference between a strategy that looks good on paper and one that actually grows a bank account.

In this guide, we’re going to pull back the curtain on how brokers price their spreads, why they fluctuate during high-impact news, and—most importantly—how you can strategically minimize these costs to keep more of your hard-earned capital.

The Anatomy of a Forex Quote

To understand the spread, we first have to look at how currency pairs are quoted. In the forex world, every price is a double-sided coin: the Bid and the Ask.

Imagine you walk into a high-end watch boutique. The dealer offers to buy your Rolex for $8,000 (the Bid), but they are selling the exact same model to the person standing next to you for $8,500 (the Ask). That $500 difference is the dealer’s profit margin for facilitating the trade. This is exactly how the bid-ask spread works in forex.

The Bid Price

This is the price the market (or your broker) is willing to pay to buy the base currency from you. If you are 'Shorting' or 'Selling' a pair, this is the price your trade will execute at.

The Ask Price

Also known as the 'Offer,' this is the price at which you can buy the base currency. If you are 'Long' or 'Buying' a pair, this is the price you pay.

Pro Tip: Remember that you always buy at the higher price and sell at the lower price. The 'gap' in between is the spread, and it represents the immediate cost of doing business.

Calculating the Spread: Real Numbers and Pipettes

Let’s get into the math. Most major currency pairs are priced to four or five decimal places. The fourth decimal place is a Pip, and the fifth is a Pipette (one-tenth of a pip).

Example 1: EUR/USD (Major Pair)

Suppose your trading platform shows the following for EUR/USD:

• Bid: 1.08502

• Ask: 1.08514

To find the spread, subtract the Bid from the Ask:
1.08514 - 1.08502 = 0.00012

In this case, the spread is 1.2 pips. If you trade one standard lot (100,000 units), each pip is worth roughly $10. Therefore, entering this trade costs you $12 immediately.

Example 2: GBP/JPY (Minor/Cross Pair)

Crosses and JPY pairs usually have wider spreads because they are less liquid.

• Bid: 185.405
• Ask: 185.438

185.438 - 185.405 = 0.033

Here, the spread is 3.3 pips. On a standard lot, that’s a $33 'tax' just to enter the market. You can see why choosing the right currency pair is a fundamental part of your cost-management strategy.

Fixed vs. Variable Spreads: Which Is Better?

Brokers generally offer two types of spread models. Choosing the right one depends entirely on your trading style.

Fixed Spreads

Fixed spreads stay the same regardless of market conditions. Whether it's a quiet Tuesday afternoon or a chaotic Non-Farm Payroll (NFP) Friday, the spread remains, say, 2 pips on EUR/USD.

• Pros: Predictable costs; great for beginners.
• Cons: Brokers often charge a premium for this stability; you might experience 'requotes' during high volatility because the broker can't fill you at the fixed price.

Variable (Floating) Spreads

These spreads fluctuate based on market conditions. When liquidity is high (like during the London/New York overlap), the spread might be as low as 0.1 pips. When the market is thin (like the Sunday open), it might balloon to 10 pips.

• Pros: Can be much cheaper during peak hours; more transparent market pricing.
• Cons: Spread 'spikes' can trigger stop-losses even if the price doesn't technically hit your level.

Warning: In a variable spread environment, your stop-loss is triggered by the Bid price (for buys) or the Ask price (for sells). During news events, the spread can widen so much that it hits your stop-loss even if the 'chart price' seems a few pips away.

The Hidden Impact of Market Liquidity

Why does the spread change? It all comes down to liquidity providers. These are the big banks (JP Morgan, Citibank, etc.) that provide the buy and sell orders that make the market move.

When there are thousands of buyers and sellers at every price level, the gap between the best buy price and the best sell price is tiny. This is High Liquidity.

However, during 'dead' times—like the hour between the New York close and the Tokyo open (the 'Rollover')—liquidity dries up. There are fewer orders in the book, so the gap between the highest bid and lowest ask widens.

According to the CME Group, liquidity is the lifeblood of efficient pricing. Without it, the spread becomes a predator that eats into your margin.

How Spread Affects Your Trading Strategy

Your strategy dictates how much you should care about the spread.

1. The Scalper (High Impact)

If you aim for 5-10 pips per trade, a 2-pip spread is a disaster. It means you need the market to move 12 pips in your favor just to net 10 pips. Scalpers must use 'Raw Spread' or ECN accounts where spreads are near zero but a small commission is charged per trade.

2. The Day Trader (Medium Impact)

If you target 30-50 pips, a 1.5-pip spread is manageable, but still something to monitor. You should avoid trading during major news releases where the spread might temporarily double.

3. The Swing Trader (Low Impact)

If your targets are 200+ pips, a 3-pip spread is negligible. You're looking for the 'big move,' and a few pips of entry cost won't break your risk management strategy.

Actionable Tips to Lower Your Trading Costs

Don't just accept the spread as an unchangeable reality. Here is how you fight back:

1. Trade the 'Majors': Stick to EUR/USD, GBP/USD, and USD/JPY. These have the highest volume and lowest spreads.
2. Watch the Clock: Trade during the London and New York sessions. Avoid the 'Asian Range' or the 'Rollover' period (5 PM EST) when spreads often triple in size.
3. Use Limit Orders: While 'Market Orders' fill you instantly at the current Ask, 'Limit Orders' allow you to specify the price you want. This doesn't eliminate the spread, but it prevents you from getting 'slipped' into a bad entry during volatility.
4. Check the News Calendar: Spreads widen significantly 5 minutes before and after high-impact data like CPI or Interest Rate decisions. Unless you are a news-spike specialist, wait for the dust to settle.
5. Calculate Your 'All-in' Cost: Some brokers offer 0.0 pip spreads but charge $7 per lot commission. Others have no commission but a 1.2 pip spread.
   • Scenario A: 0.0 spread + $7 commission = $7 total cost per lot.
   • Scenario B: 1.2 pip spread + $0 commission = $12 total cost per lot.
     Always do the math!

Conclusion

The forex spread is more than just a number on your screen; it is a fundamental market mechanic that dictates your profitability. By understanding that you are essentially paying a toll every time you cross the bridge into a trade, you can start making smarter decisions about when and what you trade.

Intermediate traders who master cost-efficiency often find that their 'edge' isn't just in picking the right direction, but in keeping their overhead low. Take a look at your recent trades—how much did you pay in spreads? If it's more than 10% of your total profit, it might be time to re-evaluate your broker or your timing.

Ready to see exactly how much your next trade will cost? Use our FXNX Spread Calculator to get real-time data on your favorite pairs.

Frequently Asked Questions

Why does the spread widen at night?

The spread widens during the 'Rollover' period (around 5:00 PM EST) because the New York market has closed and the Asian markets are just waking up. With fewer banks actively trading, liquidity drops, causing the gap between Bid and Ask to grow.

Can a wide spread trigger my stop-loss?

Yes. If you have a 'Buy' position, your stop-loss is triggered by the Bid price. If the spread widens (even if the Ask price stays the same), the Bid price could drop and hit your stop-loss. This is common during high-impact news events.

Is it better to have a low spread or no commission?

It depends on your trade frequency. Generally, high-volume traders (scalpers) prefer 'Raw' accounts with commissions and near-zero spreads, while long-term swing traders might prefer 'Standard' accounts with no commissions and slightly higher spreads for simplicity.

Which forex pair has the lowest spread?

Typically, EUR/USD has the lowest spread in the forex market due to its massive daily trading volume and high liquidity from global financial institutions.