Definition: Spread in Forex
In forex trading, the spread is the difference between the bid price (what you can sell for) and the ask price (what you can buy for) of a currency pair.
It is also called the bid-ask spread.
This is how most brokers earn revenue without charging direct commissions. The cost of a trade is built into this spread.
Example:
- EUR/USD = 1.1051 / 1.1053
- Spread = 2 pips
🔍 Why Is the Spread Important?
The spread represents your transaction cost. Every time you open a trade, you start with a slight loss due to this spread.
So, tighter spreads = lower trading costs.
🧮 How is Spread Measured?
Spreads are measured in pips.
- For most major pairs, 1 pip = 0.0001
- For JPY pairs, 1 pip = 0.01
Example:
USD/JPY = 110.00 / 110.04 → Spread = 4 pips
🔁 Types of Spreads in Forex
✅ Fixed Spreads
- Do not change with market conditions
- Offered by Market Makers or Dealing Desk brokers
- Ideal for new traders or those with small capital
- Cons: Requotes and slippage during volatile times
🔄 Variable (Floating) Spreads
- Continuously change based on market conditions
- Offered by Non-Dealing Desk brokers (STP/ECN)
- More transparent and responsive pricing
- Cons: Spreads can widen significantly during news or low liquidity
📈 Fixed vs. Variable Spreads: Which One Is Better?
| Criteria | Fixed Spreads | Variable Spreads |
|---|---|---|
| Stability | Always the same | Changes with market movement |
| Risk of Requotes | High | Low |
| Best For | Beginners, Small Accounts | Scalpers, Active Traders |
| News Trading | Risky | Risky (due to widening) |
Tip: If you’re trading high-impact news or scalping, variable spreads from ECN brokers are preferred.
💰 How to Calculate Spread Costs
Formula:
Transaction Cost = Spread (in pips) × Pip Value × Lot Size
Example:
- Spread: 1.4 pips
- Lot size: 1 mini lot (10,000 units)
- Pip value: $1
- Cost = 1.4 × $1 × 1 = $1.40
If you trade 5 mini lots, the cost = $7.00
🧠 Final Thoughts
Understanding spread is crucial to manage your trading costs effectively.
When choosing a forex broker, always compare spreads on major pairs like EUR/USD, GBP/USD, and USD/JPY.
👉 Visit our Broker Reviews Section to compare top brokers based on spread and overall cost.
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