Spread (Forex)

The spread in forex trading is the difference between the bid price (the price at which you can sell) and the ask price (the price at which you can buy) of a currency pair. It is measured in pips and represents the primary cost of executing a trade. When you enter a position, you immediately start at a small loss equal to the spread, which must be overcome before the trade becomes profitable.

For example, if EUR/USD is quoted at 1.0850/1.0852, the spread is 2 pips. If you buy at the ask price of 1.0852, the price must rise at least 2 pips to 1.0854 before you break even. The spread effectively functions as the broker's compensation for facilitating the trade, though some brokers charge an additional commission on top of the spread.

Spreads vary significantly based on several factors:

• Currency pair: Major pairs like EUR/USD typically have spreads of 0.5-2 pips, while exotic pairs like USD/TRY might have spreads of 10-50+ pips
• Market conditions: Spreads widen during periods of low liquidity (such as late-night trading sessions) or high volatility (during major news events)
• Broker type: ECN/STP brokers often offer tighter raw spreads plus a commission, while market maker brokers may offer wider spreads with no commission
• Time of day: Spreads are typically tightest during the London-New York overlap session when liquidity is highest

There are two main types of spreads. Fixed spreads remain constant regardless of market conditions and are typically offered by market maker brokers. Variable (floating) spreads fluctuate with market conditions and are common with ECN brokers, often being tighter during peak hours but widening during news events or off-hours.

For active traders, understanding and minimizing spread costs is essential because they accumulate with every trade. A scalper making 20 trades per day on a 2-pip spread is paying 40 pips in costs daily, which translates to $400 on standard lots. This is why professional traders prioritize brokers offering competitive spreads and trade during peak liquidity hours.