What is a Spread in Forex Trading?

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

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🔍 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.

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🧮 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

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🔁 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

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📈 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.

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💰 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

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🧠 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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