What is the Spread in Forex Trading?
Quick Answer: The spread is the difference between the buy price (ask) and sell price (bid) of a currency pair. It represents the broker's commission and is your immediate cost when opening a trade. Major pairs like EUR/USD typically have 0.5-2 pip spreads.
Understanding Spreads in Forex
The spread is the difference between the buy price (ask) and sell price (bid) of a currency pair. It's how brokers make money on your trades - think of it as a transaction fee built into every trade.
How Spreads Work
Every currency pair has two prices:
- Bid (Sell price) - The price you can sell at
- Ask (Buy price) - The price you can buy at
Example for EUR/USD:
Bid: 1.1000 (you sell here)
Ask: 1.1002 (you buy here)
Spread: 2 pips (1.1002 - 1.1000)
Types of Spreads
Fixed Spreads - Stay the same regardless of market conditions (usually higher but predictable)
Variable Spreads - Change based on market liquidity and volatility (usually lower during calm markets, wider during news events)
Why Spreads Matter
The spread is your immediate cost when opening a trade:
- You start every trade in a small loss (the spread)
- Price must move beyond the spread for you to profit
- Wider spreads = harder to make profitable trades
- Spreads widen during high volatility (news events, market open/close)
Typical Spread Sizes
| Pair Type | Example | Typical Spread |
|---|---|---|
| Major Pairs | EUR/USD, GBP/USD | 0.5-2 pips |
| Minor Pairs | EUR/GBP, AUD/NZD | 2-5 pips |
| Exotic Pairs | USD/TRY, EUR/ZAR | 10-50+ pips |
Choosing a Broker by Spread
When comparing brokers, consider:
- Lower isn't always better - Check execution quality and regulations too
- Day traders need tight spreads - Making many trades = spreads add up quickly
- Swing traders can handle wider spreads - Holding for days/weeks = spread cost is minimal
Practical Example
You buy EUR/USD at 1.1002 (ask price) with a 2-pip spread. To break even, the bid price must reach 1.1002. Only when bid exceeds 1.1002 do you profit. If you immediately close the trade, you lose 2 pips (the spread cost).
Learn More About Forex Trading
Now that you understand spread, explore our comprehensive guides: