Forex Spread Guide — Bid-Ask Spread in Currency Trading
The forex spread is the difference between the bid (sell) and ask (buy) price of a currency pair. It represents the broker's fee for executing the trade and is the primary cost of forex trading alongside commissions.
The spread is how most forex brokers make money. When you buy a currency pair, you pay the ask price (higher). When you sell, you receive the bid price (lower). The difference between them is the spread, measured in pips. For major pairs like EUR/USD, spreads during liquid market hours are typically 0.5-2 pips. For minor and exotic pairs, spreads can be 3-20 pips or more. For example, if EUR/USD is quoted at 1.1050/1.1052, the spread is 2 pips. A trade of 1 standard lot would cost $20 in spread (2 pips x $10 per pip) round trip.
Spreads are not constant — they vary based on market conditions and broker type. Variable spreads widen during high-volatility events (news releases, economic data, market opens) and narrow during liquid periods (London-New York overlap). Fixed spreads are offered by some brokers and remain constant regardless of market conditions, but the broker may reject trades during volatile periods or widen spreads on less liquid pairs. ECN (Electronic Communication Network) brokers offer raw spreads from liquidity providers (as low as 0.0 pips) but charge a commission per trade. Market maker brokers offer wider spreads but no commission. Understanding your broker's spread model is essential for calculating true trading costs.
Minimizing Spread Costs
Trade during liquid market sessions (London-New York overlap, 8 AM - 12 PM EST) when spreads are tightest. Trade major pairs (EUR/USD, USD/JPY, GBP/USD) which have the lowest spreads compared to minors and exotics. Avoid trading during major news releases when spreads can widen dramatically (from 1 pip to 10+ pips). Use ECN brokers for high-volume trading where the commission model is cheaper than spread markups. Consider the spread cost relative to your trading style — scalpers, who target 5-10 pip moves, need tight spreads; swing traders with 50-100 pip targets can tolerate wider spreads. Calculate spread cost as a percentage of your average target to ensure it is not eating too much of your profit.
FAQs
What is a good forex spread?
For major pairs, a spread of 1 pip or less during liquid hours is good. For minor pairs, 2-5 pips is normal. For exotic pairs, 10-20 pips is common. Spreads that are consistently higher than these ranges suggest the broker is adding excessive markup. Compare spreads across brokers using a demo account before depositing funds.
Why do spreads widen during news events?
During economic news releases, liquidity providers widen spreads because of increased uncertainty and the risk of rapid price movements. Market makers and ECNs both widen spreads during volatile periods. The spread can widen from 1 pip to 15-20 pips during NFP (Non-Farm Payroll) releases. Many traders avoid trading during these periods or use limit orders to control entry prices.
Is a fixed spread better than a variable spread?
Fixed spreads provide certainty about trading costs but often have requotes during volatile periods. Variable spreads are tighter during normal conditions but can widen unexpectedly. For most traders, variable spreads from a reputable ECN broker provide lower overall costs. Scalpers and algorithmic traders typically prefer variable spreads; less active traders may prefer fixed spreads for cost predictability.