Here’s something that might surprise you:
Every time you place a trade in the forex market, you’re automatically paying a cost that could be quietly eating away at your profits.
This cost is what we call the spread in forex trading.
The forex spread is the price difference between the buy and sell prices at which a broker lets you sell and buy a currency.
In forex, this is also known as the bid ask spread.
Think of it as the ‘built-in transaction fee’ that comes with every single trade you make.
When you pull up a currency quote on your trading platform, you’ll notice two prices staring back at you.
The bid (selling) price and the ask (buying) price.
The gap between these two prices is called the bid-ask spread.
In forex, currencies are always quoted in pairs, such as EUR/USD.
The first currency in the pair is called the base currency, and the second is the quote currency.
The base currency is what you are buying or selling, while the quote currency is what you use to make the transaction.
The exchange rate tells you how much of the quote currency you need to buy one unit of the base currency.
The gap between these two prices?
That’s your spread, typically measured in pips (the smallest unit of price movement for a currency pair).
The spread is calculated as the difference between the bid and ask prices, which directly affects the exchange rate you receive when trading.
Let me give you a real example to make this crystal clear.
If EUR/GBP is quoted at 0.903335 (bid) and 0.90330 (ask), the difference between the prices equals 0.00005.
That is equivalent to a spread of 5 points (since 1 point = 0.00001) or 0.5 pips (since 1 pip = 10 points).
Understanding forex spreads is crucial for all traders.
Seems tiny, right?
The thing is, when you trade in larger volumes or make frequent trades, these’small’ differences add up faster than you’d think.
Brokers often widen this spread to turn a profit from facilitating your trades, which means you’ll pay more when buying or receive less when selling.
The spread is considered one of the main costs of trading in forex.
Am I being dramatic when I say understanding spreads can make or break your trading success?
Not really.
Before you can profit from any trade, the market must move enough to cover the spread cost.
When a trader opens a position, they start at an immediate loss equivalent to the spread amount.
Whether you’re just starting out or you’ve been at this for years, grasping what spreads mean and how they operate is absolutely essential.
I’ll walk you through everything, from calculating spreads to understanding how they vary across currency pairs and market conditions.
By the time we’re done here, you’ll know exactly how this seemingly insignificant detail can have a major impact on your trading profitability.
Trust me, it’s worth your time.
What Does Spread Mean in Forex Trading?
The spread in forex trading represents the hidden cost that many forex traders completely overlook.
Each time you execute a trade, this fee is applied, regardless of whether you are aware of it.
For forex traders, the spread is the primary cost involved in trading currencies.
These hidden fees add up over time and are important to take note of.
The spread is a critical factor for traders employing short-term strategies like scalping, which often require tight spreads of less than 1-2 pips for viability.
Let me explain what spread is and the role it plays when you’re trading forex.
Definition of bid and ask prices
Forex brokers always display two prices for currency pairs.
These are the bid and ask prices.
The bid price is what you receive when selling a currency pair, while the ask price is what you pay when buying a currency pair.
Here’s the reality:
Whenever you place a trade with a forex broker, you’re a “price taker” rather than trading directly with other traders.
Most brokers, particularly market makers, charge a small markup known as the spread.
This is how they earn their profit in the forex market.
For this reason, the ask price will always be higher than the bid price.
Pretty straightforward, right?
How spread represents transaction cost
The spread functions as the broker’s commission.
It’s exactly how “no commission” brokers make their money.
Instead of charging a separate fee, the cost gets built into the currency prices themselves.
The spread acts as a speculative trade cost that traders incur when opening and closing positions, representing a hidden expense of entering and exiting trades.
Though small, these costs pile up quickly with frequent trading.
From a business perspective, this arrangement makes perfect sense.
The broker provides a service by:
- Selling currency to you for more than they paid
- Buying currency from you for less than they’ll sell it for
It’s basic economics in action.
Why spread is important for traders
Understanding spreads matters because they directly impact your bottom line.
Before you can profit from any trade, the market must move enough to cover the spread cost.
When spreads are wide, you need larger price movements to break even, which effectively reduces your potential profits.
In forex, even small price movements can determine whether a trade becomes profitable, especially when spreads are wide.
Even a small difference in spread can significantly affect your profitability.
This is particularly true with larger positions or multiple simultaneous trades.
This impact varies by trading style.
For scalpers who make numerous small trades, spreads are particularly critical since each position incurs this cost.
Long-term traders worry less about spreads since their profit targets typically far exceed the initial spread cost.
Spreads also provide valuable information about market conditions.
Tight spreads generally indicate high liquidity and stable markets, whereas wide spreads suggest volatility or uncertainty.
During major economic announcements, spreads often widen dramatically as market makers protect themselves against rapid price movements.
In my experience, traders who ignore spread costs are the ones who wonder why their “winning” strategies aren’t actually profitable.
Don’t be that trader.
How to Calculate Spread in Forex
Fortunately, calculating the spread in forex trading is not difficult.
In this section, we’ll show you how to calculate spreads, which is essential for understanding your trading costs.
Once you get the hang of it, you’ll be able to figure out your exact transaction costs before hitting that ‘buy’ or ‘sell’ button.
This is something that’s absolutely crucial for proper position sizing and risk management.
Allow me to break down the way us traders calculate spread when trading forex.
The spread, also known as the bid ask spread, represents the cost of trading currencies, as it is the difference between the bid and ask prices for a currency pair.
Traders should compare the spreads of different brokers to minimise trading costs.
Spread Formula Using Bid and Ask
The spread calculation comes down to basic math:
Ask Price – Bid Price.
This difference is known as the bid-ask spread.
It represents the gap between what buyers are willing to pay at the top end and what sellers will accept at the bottom.
The bid-ask spread is the implicit cost of trading in forex and acts as a built-in fee that brokers incorporate into currency pair quotes.
If you are interested in beginning your journey in forex, you may want to learn how much you need to start Forex trading in South Africa. Here’s what you need to know about pips:
For currency pairs not involving JPY, a pip equals 0.0001 (the fourth decimal place).
With Japanese yen (JPY) pairs, a pip is 0.01 (the second decimal place) due to the unique quoting conventions for the Japanese yen.
Let me break this down with a real example:
- EUR/USD quotes show 1.1053 (bid)/1.1055 (ask)
- Spread = 1.1055 – 1.1053 = 0.0002 (or 2 pips)
You can also express spread as a percentage if that’s more your style:
Spread (%) = (Ask Price – Bid Price) ÷ Ask Price × 100
Using our example above:
(0.0002 ÷ 1.1055) × 100 = 0.018%
Example: EUR/USD Spread in Pips
Let’s work through a practical example with EUR/USD.
Say the currency pair shows 1.3087 (bid)/1.3091 (ask), this means the spread equals 0.0004 or exactly 4 pips.
Here’s another scenario:
EUR/USD trading at 1.26572 (bid)/1.26583 (ask).
The spread here works out to 1.1 pips.
These differences might look tiny on paper, but they become significant when you’re trading larger positions. If you’re trading from South Africa, it’s also important to understand the tax implications for South African Forex traders.
Most traders seek “tight” or narrow spreads since they signify lower transaction costs, making each trade more affordable.
A “good spread” in forex is typically considered to be between 0 and 5 pips, especially on major currency pairs during normal market hours, as this keeps trading costs low and can improve profitability.
Tighter spreads indicate lower trading costs, while wider spreads increase trading costs.
How Pip Value Affects Cost Per Trade
This is where things get really interesting (and expensive if you’re not careful).
The actual cost of the spread scales directly with your position size, leading to a higher cost as you increase your lot size.
Bigger lots mean bigger costs.
Here’s the maths:
- A standard lot (100,000 units) with a 2-pip spread on EUR/USD costs approximately $20
- A mini lot (10,000 units) with the same spread costs about $2
If you’re trading mini lots (10,000 units), the value per pip is $1, so your transaction cost would be the spread multiplied by the number of lots you’re trading.
But wait, there’s more.
Leverage amplifies the cost of spread relative to your equity.
With 50:1 leverage and a 5-pip spread, the spread cost as a percentage of your margin deposit could hit 1.879%.
In my experience, these costs add up faster than coffee shop visits during a busy trading week, especially if you’re into frequent trades or scalping strategies.
Each individual spread might seem like pocket change, but they can seriously dent your overall profitability across multiple positions.
The key takeaway?
Always factor in spread costs when calculating your potential returns.
Don’t ignore these ‘small’ fees only to wonder why your profits are disappearing.
Types of Forex Spreads and Their Use Cases
The type of spread you choose can literally make or break your trading strategy.
I’m not exaggerating.
Most brokers offer two main types of spreads: fixed and variable spreads.
Each one caters to different trading styles and account sizes, much like choosing between a sports car and an SUV.
The spread depends on factors such as market conditions, liquidity, and your trading strategy.
The choice between fixed and variable spreads depends on a trader’s strategy and risk tolerance.
Fixed Spreads in Market Maker Models
Fixed spreads stay the same regardless of what’s happening in the market.
Think of them as a flat monthly gym membership that never changes, even when the gym gets crowded.
These are typically offered by brokers operating as market makers or “dealing desk” models.
Here’s how it works:
The broker actually becomes the counterparty to your trades, buying large positions from their liquidity providers and then offering smaller chunks to you.
The biggest advantage?
You always know what you’re paying upfront, no nasty surprises when the markets go crazy.
This predictability makes budgeting and trade planning significantly easier, especially for beginners with smaller accounts (typically under $10,000).
But here’s the catch (there’s always a catch, right?).
Fixed spreads come with some serious drawbacks.
Almost as often as those “thought leadership” posts on LinkedIn, requotes occur more often than you’d like!
When you try to enter at a specific price, the broker might block your trade and ask you to accept a new (usually worse) price.
During fast-moving markets, slippage can cause your actual entry price to be completely different from what you intended.
Variable Spreads in ECN Accounts
Variable (or floating) spreads change constantly based on real-time market conditions.
These are offered by non-dealing desk brokers who pass prices directly from multiple liquidity providers without any intervention.
The main benefit?
No requotes. Learn more about Exness ZAR account types.
Since the spread already factors in price changes due to market conditions, you won’t face those annoying trade blocks.
The pricing tends to be more transparent too, often tighter during normal market hours due to competition among liquidity providers.
However (and this is a big however), variable spreads can widen dramatically during volatility or major news events.
This makes them a nightmare for scalpers, as widened spreads can devour profits in the blink of an eye.
Spreads can expand so rapidly that a seemingly profitable trade becomes unprofitable before you can even react.
When to Use Fixed vs Variable Spreads
Your choice depends on your trading style and account size, plain and simple.
Both have their place, but certain scenarios definitely favour each type.
Go with fixed spreads if you:
- Have a smaller account (under ZAR $10,000)
- Trade less frequently
- Value cost predictability above all else
- Need simpler fee calculations
Consider variable spreads if you:
- Have deeper pockets (minimum deposits often exceed $10,000)
- Trade frequently during peak market hours
- Need lightning-fast execution without requotes
- Can handle sudden spread changes without losing sleep
Don’t simply choose the option that appears to be cheaper at first glance; your trading frequency, capital size, and risk tolerance should be the deciding factors here.
How Spreads Vary Across Currency Pairs and Market Conditions
Currency pairs are not created equal when it comes to spread costs, not by a long shot.
The difference between what you’ll pay on major pairs versus exotics can be a game changer when it comes to successful trading.
Major currency pairs like EUR/USD typically have tighter spreads compared to exotic pairs, largely due to higher market liquidity in the majors.
Market liquidity plays a key role in determining the spread. When liquidity is high, spreads tend to tighten, making it easier and cheaper to execute trades.
Conversely, spreads widen during periods of low liquidity or high volatility, such as during major economic data releases or unexpected news events.
Wider spreads typically occur during these times, increasing trading costs for participants.
Additionally, spread costs can change greatly due to market conditions and news events.
Spreads widen during periods of low liquidity or high volatility and tighten during calm, active phases.
Let me explain why these differences in spread occur so you aren’t caught off guard while trading.
Major vs Exotic Currency Pair Spreads
Major currency pairs (those involving the world’s largest economies) typically have the tightest spreads on the market.
Looking at real-world examples, EUR/USD might show a spread of just 0.6 pips, while USD/JPY hovers around 0.7 pips.
These narrow spreads exist because of their massive trading volumes, high liquidity, and generally low volatility, which further contributes to tighter spreads.
Now contrast this with exotic currency pairs.
These feature spreads that are several times wider, we’re talking significantly more expensive.
Emerging market pairs like CAD/CNH and AUD/CNH display much wider spreads.
Why?
The answer is simple:
Exotic pairs trade less frequently, creating difficulties when you’re trying to quickly enter or exit positions.
Major pairs are like busy highways with lots of traffic flowing smoothly, while exotic pairs are more like country roads where you might wait a while before another car passes by.
Impact of Liquidity and Volatility
Here’s a fundamental relationship every trader should understand:
Liquidity and spread size maintain an inverse relationship.
Higher liquidity equals tighter spreads, it’s that straightforward.
The forex market’s enormous daily turnover ensures generally tight spreads, yet these fluctuate throughout different trading sessions.
The spread acts as a direct indicator of a pair’s liquidity and trading volume.
If EUR/USD shows a 1.3 pip spread while EUR/NZD shows 4.1 pips, it’s telling you exactly which pair sees more action.
Volatility?
That’s where things get interesting.
Spreads frequently widen during volatile periods, which are marked by rapid price movement caused by economic news, political crises, or global events.
High volatility in the market typically leads to wider spreads, increasing transaction costs for traders.
Major pairs typically exhibit lower volatility, creating a more stable trading environment.
Exotic currencies, on the other hand, are subject to dramatic price swings as a result of regional factors such as political instability and domestic economic news.
These inefficient markets lead to wider spreads and elevated transaction costs.
Spread Widening During News Events
Economic releases and major news events trigger substantial spread widening.
I’ve watched spreads explode during these times more times than I can count.
When crucial reports hit the market (GDP releases, inflation data like CPI, or non-farm payrolls), spreads expand dramatically and trade execution becomes more challenging.
Fast and reliable trade execution is critical during these volatile periods to avoid requotes and slippage.
How dramatically?
Broker spreads can widen from their normal 1-5 pips to 20 pips or more within seconds.
This happens because extreme volatility makes it challenging for brokers to determine precise exchange rates.
Key points to remember**:**
- Spreads generally revert to normal levels within minutes after news events
- High-impact announcements pose the greatest risk of spread widening
- Variable spreads get hit harder than fixed spreads during these events
- Efficient trade execution is crucial during these times to minimise trading costs
Even the time of day, or trading hours, affects your spread costs.
Trading EUR/USD during Asian sessions typically costs more than during European hours.
During high liquidity trading hours, such as major session overlaps, spreads tend to narrow, while during quieter trading hours, spreads can widen.
Timing really does matter when you’re trying to minimise transaction costs.
My advice?
Plan your trades around these market dynamics, not against them.
How Forex Brokers Determine Spreads
Ever wondered why the spread on EUR/USD is so much tighter than on a more obscure currency pair?
The key factor is how forex brokers set their spreads, and understanding this can help you keep your trading costs in check.
Forex brokers determine spreads by looking at several key factors: the liquidity of the currency pair, current market conditions, and their own business model.
For major currency pairs like EUR/USD, which see massive trading volumes and high liquidity, brokers can offer much tighter spreads.
That’s because there’s a constant flow of buyers and sellers, making it easy to match trades at competitive prices.
Conversely, less liquid pairs such as exotics or minor crosses tend to have wider spreads.
With fewer participants in the market, brokers need to cover the risk of price swings and lower trading activity, so the cost to trade these pairs goes up.
Brokers also choose between offering fixed spreads and variable spreads.
Fixed spreads stay the same no matter what’s happening in the market, giving you predictability in your trading costs.
These are often found with market maker brokers, who set their own bid and ask prices.
Variable spreads, on the other hand, fluctuate in real time based on market volatility and liquidity.
During periods of high volatility or low liquidity, such as after major news releases, variable spreads can widen significantly.
Ultimately, the spread you see on your trading platform is a reflection of both the underlying market conditions and the broker’s pricing model.
Some brokers may offer fixed spreads to attract traders who value stability, while others offer variable spreads that can be extremely tight during normal market conditions, particularly on major pairs with high liquidity.
Understanding how your forex broker determines spreads is essential.
It allows you to anticipate trading costs, choose the right broker for your needs, and avoid surprises when market volatility hits.
Whether you’re trading EUR/USD or a more exotic currency pair, knowing what affects your spread can make a real difference to your bottom line.
Managing Spreads in Forex Trading
If you want to boost your trading performance and keep more profits in your account, managing spreads should be at the top of your forex trading checklist.
First, start by choosing a forex broker that offers competitive spreads and a transparent fee structure.
Look for brokers that provide access to raw spreads or tighter spreads, especially if you’re an active trader.
The right account type can also make a big difference.
ECN or STP accounts often come with lower spreads, though they may charge a small commission instead.
Timing is everything in the forex market.
Trading during peak market hours, when major trading sessions like London and New York overlap, usually means higher liquidity and tighter spreads.
Avoid trading during off-hours or around major global events, as market volatility can cause spreads to widen dramatically, increasing your trading costs.
It’s also crucial to understand what causes spread fluctuations.
Economic news releases, unexpected global events, and sudden shifts in market volatility can all lead to wider spreads.
By staying informed and employing risk management tools such as stop-loss orders and position sizing, you can reduce the impact of spread changes on your trading.
Professional traders often use a combination of technical and fundamental analysis to anticipate when spreads might widen or tighten.
For example, if you know a major economic announcement is coming, you might choose to sit on the sidelines or adjust your trading strategy to account for potential spread spikes.
Finally, always factor spread costs into your overall trading strategy.
Whether you’re scalping for small gains or holding positions longer term, understanding and managing your spread exposure is key to long-term success in the forex market.
By being proactive and strategic, you can turn spread management from a hidden cost into a competitive advantage.
Now Put this Knowledge to Use
We’ve covered a lot of ground here, and I hope you’re starting to see why spreads deserve more attention than most traders give them.
The reality is this:
Forex spreads are the silent profit-eater that can make the difference between a profitable trading career and one that leaves you wondering where all your money went.
Think about it for a second.
Every trade you place comes with this built-in cost.
Every single one.
Regardless of whether you place one trade a day or fifty, and whether you focus on major pairs or explore exotic ones, the spread cost is consistently present.
It is always poised to take its share from your transactions.
Most traders I’ve encountered over the years get so caught up in patterns, indicators, and ‘winning strategies’ that they completely overlook this fundamental cost structure.
It’s like focusing on the engine of your car while ignoring the fuel consumption.
Here’s what I’ve learnt from watching countless traders succeed and fail:
The ones who consistently profit are the ones who pay attention to every detail, including the ‘boring’ stuff like spreads.
So, what should you take away from all this?
First, start treating spreads as a core part of your trading plan, not an afterthought.
Calculate your spread costs before you place trades, not after.
Know what you’re paying and factor it into your risk management.
Second, match your spread choice to your trading style.
If you’re scalping for quick profits, those variable spreads during news events, unlike the typically calmer Asian session, will eat you alive.
If you’re swing trading, you can probably live with slightly higher spreads in exchange for better execution.
Third, timing matters more than you think.
Trading EUR/USD during Asian hours when liquidity is thin?
You’re paying more than you need to.
Trade smarter, not just harder.
Traders can manage spreads by choosing the right broker and timing their trades strategically during high liquidity periods, allowing traders to reduce transaction costs and improve their overall results.
Before risking real money, use a demo account to practise and understand how spreads impact your trades in real market conditions.
Experienced traders often leverage their knowledge of spreads and market timing to optimise trading performance, especially when using raw spread or market-based pricing accounts.
The forex market isn’t going anywhere; it’ll still be here tomorrow, next month, and next year.
But your trading capital?
That’s finite.
Every pip you save on spreads is a pip that stays in your account, compounding your success over time.
I’ve seen too many promising traders get derailed by ignoring the basics while chasing the latest ‘secret strategy.’
Don’t be one of them.
Understanding spreads won’t make you rich overnight, but it will keep you in the game longer and in forex trading, survival is the first step to success.
The next move is yours to make.
