What Is the Spread in Forex?

Have you ever clicked 'Buy' on a EUR/USD trade, only to see your P/L window immediately flash red? It feels like the market is personally offended by your entry. But don't worry—it’s not the market's vendetta; it’s the spread.

For many beginners, the spread is just a minor detail. But as an intermediate trader, you know better. You’ve likely realized that the spread is the 'invisible' friction that can turn a winning strategy into a break-even struggle. Whether you're scalping the 1-minute charts or swinging the dailies, the spread is the first hurdle every single trade must clear. In this guide, we’re going to move past the textbook definitions and dive into the mechanics of how spreads actually impact your bottom line, how they change during high-impact news, and how to calculate your true cost of doing business.

The Mechanics of the Bid-Ask Spread

At its simplest, the spread is the difference between the price you pay to buy a currency (the Ask) and the price you receive when you sell it (the Bid). Think of it like a currency exchange booth at an airport. They might sell you Euros for $1.15 but only buy them back from you for $1.10. That $0.05 difference is their profit margin for providing the service.

In the forex market, liquidity providers (like big banks) and brokers do the same thing.

Example: You look at your platform and see EUR/USD quoted as 1.0850 / 1.0852.

If you buy at 1.0852, you are immediately "down" 2 pips because the market will only let you sell that position back at 1.0850. To break even, the Bid price must rise to 1.0852.

For intermediate traders, the nuance lies in why that spread exists. It represents the liquidity of the pair. Major pairs like EUR/USD or USD/JPY usually have razor-thin spreads (often less than 1 pip) because there are millions of buyers and sellers at any given second. Exotic pairs, like USD/TRY (Turkish Lira), can have spreads of hundreds of pips because fewer people are willing to take the other side of your trade. Understanding this liquidity hierarchy is essential for choosing which pairs to trade.

Fixed vs. Variable Spreads: Which Is Better?

Not all brokers handle spreads the same way. You’ll generally encounter two models: Fixed and Variable (Floating).

The Fixed Spread Model

Fixed spreads stay the same regardless of market conditions. If the broker says the spread on GBP/USD is 3 pips, it stays 3 pips during the quiet Asian session and during a chaotic NFP Friday.

• Pros: Predictability. You always know your costs.
• Cons: You usually pay a premium. Fixed spreads are often higher than the average variable spread. Also, during high volatility, fixed-spread brokers may suffer from 'requotes' because they can't fill your order at the artificial price they promised.

The Variable (Floating) Spread Model

This is the standard for most ECN (Electronic Communication Network) and STP (Straight Through Processing) brokers. The spread fluctuates based on supply and demand.

• Pros: During high liquidity (like the London/New York overlap), spreads can drop to 0.0 or 0.1 pips on majors.
• Cons: During news events or the 'rollover' period (5 PM EST), spreads can explode to 10x or 20x their normal size.

Pro Tip: If you are a swing trader, variable spreads are usually better because you aren't entering often and want the lowest cost. If you are a news trader, a fixed spread (if you can find a broker who actually fills orders) might save you from 'spread spikes'.

Calculating the Real Dollar Cost of Spreads

To manage your risk management strategy, you need to convert pips into your account currency. A 2-pip spread feels different depending on your lot size.

Let's use the standard formula:
Cost = Spread (in decimals) x Lot Size

Assume you are trading EUR/USD with a 1.5 pip spread:

1. Standard Lot (100,000 units):
   • 0.00015 x 100,000 = $15.00
2. Mini Lot (10,000 units):
   • 0.00015 x 10,000 = $1.50
3. Micro Lot (1,000 units):
   • 0.00015 x 1,000 = $0.15

Warning: Never ignore the cumulative cost. If you scalp 10 times a day with a standard lot and a 1.5 pip spread, you are paying $150 daily just to enter the market. Over a 20-day trading month, that’s $3,000 in 'invisible' fees. Your strategy needs to earn more than $3,000 just to be at $0 profit.

For a deeper look at how these costs interact with your capital, check out our guide on calculating pip values across different currencies.

The Spread Trap: Slippage and News Volatility

This is where many intermediate traders get burned. You’ve set a perfect Stop Loss 20 pips away. A major news event hits—say, the Consumer Price Index (CPI). Suddenly, the spread on your pair jumps from 1 pip to 15 pips because liquidity providers pull their orders from the book to protect themselves.

If the market moves fast, your Stop Loss might not be triggered at your exact price. This is called slippage.

Imagine you have a Sell Stop at 1.1000. During a news spike, the Bid price jumps from 1.1005 straight to 1.0980. Because there were no buyers at 1.1000 during that millisecond of chaos, your broker fills you at the next available price: 1.0980. You just lost an extra 20 pips due to the spread widening and lack of liquidity.

According to the Bank for International Settlements (BIS), foreign exchange is the most liquid market in the world, but even that liquidity can vanish in a heartbeat during 'black swan' events. This is why many pros avoid holding tight stops through high-impact news releases.

Strategies to Minimize Spread Impact

How do you fight back against the spread? It’s about timing and tactics.

1. Trade the Overlaps: The lowest spreads occur when the London and New York sessions overlap (8:00 AM – 12:00 PM EST). This is when liquidity is at its peak. Avoid trading the hour before the New York close, as spreads often widen significantly during the 'roll-over'.
2. Use Limit Orders: Market orders say "get me in at any price," which makes you vulnerable to wide spreads. Limit orders say "get me in only at this price or better." While a limit order might not get filled, it protects you from entering a trade with a massive spread penalty.
3. Focus on Major Pairs: If you're struggling with costs, move away from crosses like GBP/AUD (typically 3-5 pips) and stick to EUR/USD or USD/JPY (typically 0.5-1.5 pips).
4. Account Types: Consider an ECN account. While you'll pay a small commission per trade, the spreads are often near zero. For high-frequency traders, this is almost always cheaper than a 'Commission-Free' account with marked-up spreads.

Conclusion

The spread isn't just a fee; it’s a dynamic part of the market environment. For an intermediate trader, mastering the spread means moving from "guessing" your costs to "calculating" them. It means knowing when to step away from the terminal (like during high-spread news events) and when to strike (during peak liquidity).

Your next step? Open your trading platform and look at the 'Market Watch' window. Right-click and enable the 'Spread' column. Watch how it changes when the New York session opens today. Once you can visualize that cost in real-time, you'll start making much smarter entry decisions.

Ready to take your technical analysis to the next level? Check out our guide on advanced candlestick patterns to find better entries that offset your spread costs.

Frequently Asked Questions

Why does the spread increase at night?

Forex spreads usually widen around 5:00 PM EST (the New York close) because this is the 'rollover' period. Major banks rebalance their books, and liquidity drops significantly as the market transitions to the Asian session.

Is a lower spread always better?

Not necessarily. A broker might offer a 0-pip spread but charge a high commission or have poor execution (slippage). Always look at the "Total Cost of Trade," which includes the spread, commissions, and potential slippage.

How do I calculate the spread in pips?

Subtract the Bid price from the Ask price. For example, if the Ask is 1.2505 and the Bid is 1.2503, the difference is 0.0002, which equals 2 pips. For JPY pairs, the second decimal point represents the pip (e.g., 140.52 - 140.50 = 2 pips).