In forex trading, the spread is the difference between the bid price (the price at which you can sell a currency pair) and the ask price (the price at which you can buy it). It represents the cost of trading and is a crucial factor affecting your profitability.

This article explains what the spread is, types of spreads, how spreads impact trading costs, and tips to manage spreads effectively.

Key Takeaways

• The spread is the cost paid to the broker to execute a trade.
• It is measured in pips (the smallest price movement in forex).
• Two main types of spreads: fixed and variable (floating).
• Tight spreads mean lower trading costs and better trade entry.
• Spreads can widen during volatile market conditions or low liquidity.

What Is Forex Spread?

Term	Definition
Bid Price	The price at which you can sell a currency pair
Ask Price	The price at which you can buy a currency pair
Spread	Difference between ask and bid prices (Ask – Bid)

Example:
If EUR/USD bid is 1.1050 and ask is 1.1052, the spread is 2 pips.

Types of Forex Spreads

• Fixed Spread: Remains constant regardless of market conditions; common in standard accounts.
• Variable (Floating) Spread: Changes according to market volatility and liquidity; common in ECN or raw spread accounts.

How Spreads Affect Trading Costs

• Spreads are the implicit cost of entering and exiting trades.
• Wider spreads increase the break-even point of a trade.
• High-frequency and scalping traders prefer brokers with tight spreads.
• Some brokers offer zero spread accounts but charge commissions instead.

Tips to Manage Spreads

• Trade major currency pairs which usually have tighter spreads.
• Avoid trading during off-market hours when spreads widen.
• Use ECN or raw spread accounts for more competitive spreads.
• Monitor economic news that can cause spread volatility.

Case Study: Impact of Spread on Profitability

Tom trades EUR/USD with a broker offering a fixed 1.5 pip spread. After enrolling in a CPD accredited Forex Course, he switched to a raw spread account with spreads from 0.1 pips plus a small commission. This change reduced his trading costs significantly, improving his net profitability.

Frequently Asked Questions

What is a forex spread?

The forex spread is the difference between the buying (ask) and selling (bid) prices of a currency pair.

Why do spreads vary?

Spreads fluctuate based on market liquidity, volatility, time of day, and broker type.

Which pairs have the tightest spreads?

Major pairs like EUR/USD, GBP/USD, and USD/JPY typically have the tightest spreads.

How can I get lower spreads?

By choosing ECN or raw spread accounts and trading during peak market hours.

Do fixed spreads cost more than variable spreads?

Fixed spreads may be wider during normal conditions but remain stable; variable spreads can be narrower but widen during volatility.