What Is the Spread in Forex? A Trader's Guide to Cost Optimization

Imagine you’re at a local currency exchange booth at the airport. You see two prices for the Euro: one to buy it and one to sell it. If you buy €100 and immediately change your mind and sell it back, you’ll walk away with less money than you started with.

That “gap” between the two prices is the spread. In the world of online forex trading, that gap is your primary cost of doing business.

Many intermediate traders treat the spread as a minor annoyance, a few pips here and there that don’t really matter. But if you’re placing 20 trades a month, those “minor” pips can quietly devour 10% to 20% of your potential profits. If you want to move from a hobbyist to a professional mindset, you need to stop ignoring the spread and start managing it.

In this guide, we’re going to look past the basic definitions. We’ll dive into the mechanics of liquidity, the math of dollar-costs, and the strategies you can use to ensure the spread doesn't kill your edge.

The Mechanics of the Bid and the Ask

In every forex quote, you’ll see two prices. For example, you might see EUR/USD quoted as 1.0850 / 1.0852.

1. The Bid (1.0850): This is the price at which the market (or your broker) is willing to buy the base currency from you. If you want to sell EUR/USD, this is your price.
2. The Ask (1.0852): This is the price at which the market is willing to sell the base currency to you. If you want to buy EUR/USD, this is your price.

Example: If you click 'Buy' on EUR/USD at the quote above, your trade opens at 1.0852. However, the current 'market value' (the Bid) is 1.0850. You are effectively starting your trade -2 pips in the hole. The market has to move 2 pips in your favor just for you to reach break-even.

Why does this gap exist? Brokers aren't charities. They provide the platform, the liquidity, and the execution. The spread is how they get paid for the risk and infrastructure they provide. According to the Bank for International Settlements (BIS), the forex market sees over $7.5 trillion in daily turnover—the spread is the friction that keeps that massive engine lubricated.

Fixed vs. Variable Spreads: Which Is Better?

As you progress in your trading journey, you’ll realize that not all spreads are created equal. Brokers generally offer two types of pricing models.

Fixed Spreads

Fixed spreads remain the same regardless of market conditions. Whether it’s a quiet Tuesday afternoon or a chaotic NFP Friday, the spread on EUR/USD might stay at a constant 2 pips.

• The Pro: Predictability. You know exactly what your costs are before you enter.
• The Con: Requotes. During high volatility, brokers offering fixed spreads may struggle to fill your order at the stated price because the underlying market is moving too fast.

Variable (Floating) Spreads

Variable spreads fluctuate based on market conditions. In a highly liquid market, the spread on EUR/USD might drop to 0.2 pips. During a major news event, it might spike to 10 pips.

• The Pro: Transparency and potential for lower costs. Most ECN vs. Market Maker accounts use variable spreads to reflect the real-time interbank market.
• The Con: Uncertainty. A sudden spike in the spread can trigger a stop-loss even if the underlying price hasn't moved significantly.

Pro Tip: If you are a swing trader holding positions for days, a variable spread is usually better because you can afford to wait for a quiet entry. If you are a news trader, a wide variable spread can be your worst enemy.

The Math: Calculating Spread in Real Dollars

To manage your risk, you must convert pips into your account currency. Let's look at a practical scenario involving GBP/USD.

Imagine the quote is 1.2650 / 1.2651.5. The spread is 1.5 pips.

If you are trading a Standard Lot (100,000 units), the value of a pip is typically $10.

• Calculation: 1.5 pips x $10 = $15 cost per trade.

If you are trading a Mini Lot (10,000 units), the pip value is $1.

• Calculation: 1.5 pips x $1 = $1.50 cost per trade.

Now, let's compare this to a cross pair like GBP/JPY, which often has a higher spread, say 3.5 pips.

• Standard Lot: 3.5 pips x ~$9.20 (depending on JPY rate) = ~$32.20.

Warning: Always check the spread on cross pairs (like EUR/AUD or GBP/NZD) before entering. A 5-pip spread on a large position can put you at a significant disadvantage before the trade even begins.

Why Spreads Widen (and How to Avoid the Trap)

Spreads aren't static because liquidity isn't static. Liquidity refers to how many buyers and sellers are active at a specific price.

1. The "Witching Hour"

Between 5:00 PM and 6:00 PM EST (the New York close and the Sydney open), liquidity is at its lowest. Major banks are shifting books, and many liquidity providers go offline.

Example: You might see a 1-pip spread on USD/JPY jump to 8 pips at 5:05 PM EST. If you have a tight stop-loss of 10 pips, the spread alone could take you out of a winning trade.

2. High-Impact News

When the Federal Reserve announces an interest rate hike, the market becomes a ghost town for a split second as everyone pulls their orders to see where the dust settles. With no orders in the book, the gap between the best buyer and the best seller widens drastically.

3. Low Liquidity Pairs

Pairs like USD/TRY or EUR/PLN have far fewer participants than the "Majors." Because there are fewer people to take the other side of your trade, the broker charges a higher premium (spread) to compensate for the risk of holding that position.

Learn more about risk management strategies to protect your capital during these volatile windows.

Spread-Sensitive Strategies for Intermediate Traders

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

Scalping

If you are targeting 5-10 pips per trade, a 2-pip spread is a massive hurdle. It represents 20-40% of your target profit. Scalpers should almost exclusively use ECN accounts with raw spreads and pay a flat commission instead. Check out our forex scalping guide for more on this.

Swing Trading

If your target is 150 pips, a 2-pip spread is negligible (only 1.3% of your target). You have more flexibility and can trade higher-spread pairs if the setup is right.

Limit Orders vs. Market Orders

Market orders execute immediately at the current 'Ask' (for buys) or 'Bid' (for sells). You pay the full spread immediately.

Limit orders, however, allow you to specify a price. While you still technically deal with the spread, using limit orders during quiet market times can help you get "filled" at more advantageous levels, especially if you're trading the news where slippage is a risk.

How to Choose a Broker Based on Spread Structure

Don't just look for the "lowest" spread. Look for the most consistent spread.

• Check the Average, Not the Minimum: Many brokers advertise spreads "as low as 0.0 pips," but that might only happen for three seconds at 3:00 AM. Look for the average spread during the London/New York overlap.
• Commissions vs. All-in Spreads: Some brokers offer "Zero Spread" accounts but charge $7 per round-turn lot in commission.

Pro Tip: To compare fairly, convert the commission into pips. If a commission is $7 per lot, and 1 pip = $10, then your commission is effectively 0.7 pips. Add that to the raw spread (e.g., 0.1 pips) for a total cost of 0.8 pips.

Conclusion

The spread is more than just a number on your screen—it's a dynamic reflection of market health and your primary trading cost. For intermediate traders, mastering the spread means knowing when not to trade (like the New York close), choosing the right account type for your strategy, and always calculating the dollar-impact of those pips before clicking 'execute'.

Your next step? Open your trading platform and look at the spread on your favorite pair during three different times today: the London open, the NY/London overlap, and the NY close. You'll be surprised at how much the "price of admission" changes.

Frequently Asked Questions

Why is my forex spread so high right now?

Spreads typically widen during periods of low liquidity (like the 5 PM EST daily rollover) or extreme volatility (during major news events). If there are fewer participants in the market, brokers increase the spread to cover their increased risk.

How do I calculate the spread in pips?

Simply subtract the Bid price from the Ask price. For example, if the EUR/USD Bid is 1.0950 and the Ask is 1.0952, the spread is 0.0002, which is 2 pips.

Is a lower spread always better for trading?

Not necessarily. A broker might offer a very low spread but have poor execution, leading to frequent slippage. It is better to have a slightly higher, stable spread with reliable fills than a "zero spread" that you can never actually catch.

Does the spread affect my stop-loss?

Yes. Remember that a Buy trade is closed by Selling at the Bid price, and a Sell trade is closed by Buying at the Ask price. If the spread widens significantly, the Ask price could hit your stop-loss on a short position even if the chart (which usually shows the Bid price) hasn't reached that level yet.