The spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair. It is the primary cost of trading forex and represents the broker’s compensation for facilitating your trades. Understanding spreads is essential because they directly affect your profitability on every single trade.
How Spreads Work
Every forex pair has two prices:
- Bid price — The price at which you can sell (what buyers will pay)
- Ask price — The price at which you can buy (what sellers are offering)
The spread is the gap between them.
Example
| Bid | Ask | Spread | |
|---|---|---|---|
| EUR/USD | 1.0842 | 1.0843 | 1.0 pip |
| GBP/JPY | 189.45 | 189.48 | 3.0 pips |
| USD/CHF | 0.8823 | 0.8825 | 2.0 pips |
When you buy EUR/USD at 1.0843 (the ask), you could immediately sell at 1.0842 (the bid) — losing 1.0 pip. This means every trade starts at a loss equal to the spread.
Spread Cost Calculation
Spread Cost = Spread (pips) × Pip Value × Number of Lots
Example: EUR/USD with 1.0 pip spread, trading 1 standard lot: 1.0 × $10.00 × 1 = $10.00 per round trip
Over 100 trades per month, that’s $1,000 in spread costs alone.
Types of Spreads
Fixed spreads
Stay constant regardless of market conditions. Offered by market maker brokers. Predictable but typically wider than variable spreads during normal conditions.
Variable (floating) spreads
Change based on market liquidity and volatility. Tighter during active sessions, wider during news events and low-liquidity periods. Most ECN and STP brokers offer variable spreads.
Raw spreads + commission
The broker passes through the interbank spread (often 0.0-0.3 pips on majors) and charges a separate commission per lot. Total cost is usually lower than standard accounts for active traders.
What Affects Spread Width
| Factor | Effect on Spread |
|---|---|
| Pair liquidity | Major pairs (EUR/USD) have tighter spreads than exotics (USD/TRY) |
| Time of day | Tightest during London/NY overlap, widest during rollover (5 PM EST) |
| News events | Widen significantly during NFP, FOMC, ECB decisions |
| Market volatility | Higher volatility = wider spreads |
| Broker type | ECN/raw spread < standard/market maker |
Spread Impact on Different Strategies
Scalpers are most affected by spreads. If you target 10 pips per trade and the spread is 1.5 pips, you need a 15% move just to cover the spread cost. Over hundreds of trades, this adds up to thousands of dollars.
Swing traders are least affected because the spread is a small percentage of their typical 100-300 pip moves.
Tracking Spreads in Your Journal
Recording the spread at entry for every trade lets you:
- Calculate true execution cost per trade and per month
- Compare broker performance over time
- Identify high-spread periods you should avoid trading during
- Segment performance by spread conditions — do you perform worse when spreads are elevated?
PipJournal helps you track spread costs per trade and identify how much of your P&L is being consumed by execution costs.
