Forex spread is the difference between the bid price (the price at which a trader can sell a currency) and the ask price (the price at which a trader can buy a currency) in the forex market. It represents a key trading cost that affects the profitability of trades. In this article, we’ll explain how forex spreads work, the factors influencing them, and practical steps to manage them effectively.

Understanding Forex Spread

The spread is measured in pips, which are the smallest price movement units in forex trading. Brokers typically display both bid and ask prices on their trading platforms, and the spread is the gap between these two prices. But what is forex spread exactly? It represents the core cost of trading.

Key types of forex spreads:

1. Fixed Spread: The spread remains constant regardless of market conditions.
2. Variable Spread: The spread fluctuates depending on market liquidity and volatility.
3. Raw Spread: A near-zero spread offered by brokers that charge a commission instead.

Common Challenges with Forex Spreads

1. Wider Spreads in Volatility: High market volatility can lead to wider spreads, increasing trading costs.
2. Low-Liquidity Pairs: Exotic currency pairs often have wider spreads due to lower trading volume. What is forex spread in such pairs? It often reflects the challenge of finding counterparties.
3. Hidden Costs: Some brokers may include additional costs within the spread, reducing transparency.
4. Impact on Scalping Strategies: For high-frequency traders, even slight changes in spreads can impact profitability.

Step-by-Step: How Forex Spread Works

1. Place an Order: A trader initiates a buy or sell order for a currency pair. Understanding what affects forex spread helps in timing orders better.
2. Pay the Spread: The cost of the spread is factored into the trade, reducing the initial profit potential.
3. Monitor Market Conditions: Spreads may widen or tighten depending on liquidity and volatility.
4. Close the Trade: The spread must be covered by market movement for the trader to realise a profit.

Practical and Actionable Advice

• Choose a Broker with Tight Spreads: Select brokers offering competitive spreads, especially for major currency pairs.
• Trade During Peak Hours: Higher liquidity during major trading sessions leads to tighter spreads. Hence, it’s crucial to understand what forex spread is.
• Avoid Exotic Pairs: Stick to major and minor pairs for lower spreads and better trading conditions.
• Check Broker Transparency: Ensure your broker clearly outlines their spread policies to avoid hidden costs.
• Use a Demo Account: Practise trading with a demo account to understand how spreads impact trades.

FAQs

What is forex spread?
It’s the difference between the bid and ask price of a currency pair, representing a trading cost.

How is the spread measured?
The spread is measured in pips, the smallest price movement unit in forex.

What factors influence forex spreads?
Liquidity, volatility, currency pair type, and broker policies affect spreads.

What is the difference between fixed and variable spreads?
Fixed spreads remain constant, while variable spreads fluctuate with market conditions.

Why are spreads wider during news events?
High volatility and low liquidity during news events cause spreads to widen.

How do spreads impact scalping strategies?
Scalpers rely on tight spreads to maximise profits from frequent trades.

What are raw spreads?
Raw spreads are near-zero spreads offered by brokers that charge a commission instead.

Which currency pairs have the lowest spreads?
Major pairs like EUR/USD and GBP/USD typically have the lowest spreads due to high liquidity.

Can spreads change during a trade?
Yes, variable spreads can widen or tighten while a position is open.

How can traders minimise spread costs?
By trading major pairs, choosing a reliable broker, and avoiding volatile periods.

Conclusion

Forex spread is a fundamental concept that directly affects trading costs and profitability. By understanding how spreads work and selecting the right trading conditions, traders can optimise their strategies and reduce expenses. Ready to master forex trading concepts and improve your profitability? Unlock your full potential with our expert-led trading courses. Gain insights, learn winning strategies, and take control of your trading journey today.