What Are Forex Spreads?
The spread is the difference between the bid price (what buyers are willing to pay) and the ask price (what sellers are asking for) of a currency pair. It represents the primary cost of executing a trade with most forex brokers. Understanding spreads is essential because they directly impact your profitability.
Types of Spreads
Fixed Spreads: Remain constant regardless of market conditions. These are typically offered by market maker brokers and provide predictable trading costs. However, fixed spreads are usually wider than the tightest variable spreads available.
Variable (Floating) Spreads: Fluctuate based on market liquidity and volatility. During high-liquidity periods (London-New York overlap), spreads narrow significantly. During low-liquidity periods or major news events, they can widen substantially.
What Determines Spread Width?
- Currency Pair Liquidity: Major pairs like EUR/USD typically have the tightest spreads (0.1-1.5 pips), while exotic pairs can have spreads of 5-50+ pips
- Market Session: Spreads are tightest during overlapping trading sessions when liquidity is highest
- Volatility: Major economic releases and geopolitical events can cause spreads to widen dramatically
- Broker Model: ECN/STP brokers typically offer tighter raw spreads plus commission, while market makers offer wider all-inclusive spreads
Calculating the True Cost of Trading
To compare brokers accurately, calculate the total cost per trade:
Total Cost = Spread Cost + Commission + Swap Fees
For a standard lot (100,000 units) of EUR/USD with a 1.0 pip spread, the cost is approximately $10. With a raw spread of 0.2 pips plus $7 commission round-turn, the total cost is $9 -- making the raw spread account slightly cheaper despite the commission.
Strategies to Minimize Spread Costs
- Trade during high-liquidity sessions (London and New York overlap: 13:00-17:00 GMT)
- Focus on major currency pairs with naturally tight spreads
- Consider raw spread accounts if you trade frequently
- Avoid trading during major news releases when spreads spike
- Compare total trading costs (spread + commission) rather than just advertised spreads