What Is a Spread in Forex? How Spreads Affect Your Trading Costs
The spread is the most fundamental cost in forex trading, and it's the one most beginners ignore. There are no commissions on many forex accounts — so people assume trading is "free." It isn't. The spread is how your broker gets paid, and it comes directly out of your potential profit on every single trade.
Understanding spreads — how they work, what affects them, and how to minimise their impact — is essential for any trader who cares about actually keeping their profits.
The Bid-Ask Spread, Explained
Every currency pair has two prices at any given moment:
- Bid price: The price at which you can sell
- Ask price: The price at which you can buy
The spread is the difference between these two. If EUR/USD has a bid of 1.08500 and an ask of 1.08520, the spread is 2.0 pips.
When you open a buy trade, you enter at the ask price. To close that trade (sell), you exit at the bid price. This means the moment you enter a trade, you're already in a small loss equal to the spread. Price needs to move in your favour by at least the spread amount before you break even.
This is true for every trade. Every single one. Which is why the spread matters far more than most beginners realise.
How Much Does the Spread Actually Cost?
The cost depends on two things: the spread size and your position size.
Formula: Spread Cost = Spread in Pips x Pip Value x Number of Lots
For a standard lot (100,000 units) on EUR/USD:
- 1 pip = $10
- 2.0 pip spread = $20 per trade
For a mini lot (10,000 units):
- 1 pip = $1
- 2.0 pip spread = $2 per trade
That $20 on a standard lot might seem small, but it compounds. If you take five trades per day, that's $100 in spread costs daily. Over 20 trading days, that's $2,000 per month — before you've made or lost anything from your actual trades.
For detailed calculations on pip values across different pairs and lot sizes, see our pip value guide.
Fixed vs Variable Spreads
Fixed Spreads
Fixed spreads stay the same regardless of market conditions. If your broker offers a 2-pip fixed spread on EUR/USD, it's 2 pips at 3am and 2 pips during a Fed announcement.
Advantages: Predictable costs. Easier to calculate exact risk and reward on every trade.
Disadvantages: Fixed spreads are typically wider than variable spreads during normal conditions, because the broker bakes in a buffer to cover their risk during volatile periods. You're paying for certainty.
Variable (Floating) Spreads
Variable spreads fluctuate based on market conditions. During peak liquidity hours (London-New York overlap), EUR/USD might have a 0.5-pip spread. During low-liquidity Asian session hours, it might widen to 2-3 pips. During a major news event, it might spike to 8-10 pips or more.
Advantages: Tighter spreads during normal trading hours. Lower average cost per trade if you time your trades well.
Disadvantages: Costs are unpredictable. Spreads can widen dramatically during news events, low liquidity, or market shocks — right when you might be trying to enter or exit a trade.
Most ECN/STP brokers offer variable spreads, which reflect the actual interbank market. Market maker brokers often offer fixed spreads.
What Determines Spread Size?
Several factors affect how wide or tight a spread is:
1. Currency Pair Liquidity
Major pairs have the tightest spreads because they have the deepest pools of buyers and sellers:
| Pair | Typical Spread | Liquidity |
|---|---|---|
| EUR/USD | 0.5–1.5 pips | Highest |
| GBP/USD | 1.0–2.0 pips | Very high |
| USD/JPY | 0.5–1.5 pips | Very high |
| AUD/USD | 1.0–2.0 pips | High |
| USD/ZAR | 8–15 pips | Low-medium |
| EUR/TRY | 15–40 pips | Low |
Exotic pairs like USD/ZAR or EUR/TRY have much wider spreads because there are fewer participants and less volume. This is critical to understand when choosing currency pairs — wider spreads mean higher costs per trade.
2. Time of Day
Spreads tighten when multiple financial centres are active (especially the London-New York overlap) and widen when liquidity thins out (late US session, early Asian session, weekends).
3. Market Volatility
Major economic releases — Non-Farm Payrolls, interest rate decisions, inflation data — cause spreads to widen sharply in the minutes around the announcement. Brokers widen spreads during these events because price is moving so fast that the risk of filling orders at stale prices increases.
4. Broker Type and Model
- ECN/STP brokers pass through real interbank spreads plus a small commission
- Market makers set their own spreads and may widen them at their discretion
- Hybrid models combine elements of both
5. Account Type
Many brokers offer multiple account types with different spread structures. A raw spread account might offer 0.0 pip spreads with a $7 round-turn commission, while a standard account might offer 1.5 pip spreads with no commission. The total cost can be similar, but the structure differs.
Spreads and Your Trading Strategy
The impact of spreads depends heavily on your trading style:
Scalpers: Spreads Are Everything
If you're targeting 5-10 pips per trade, a 2-pip spread eats 20-40% of your profit potential. Scalpers need the tightest possible spreads on the most liquid pairs. A 0.5-pip spread versus a 2.0-pip spread is the difference between viability and futility for this style.
Day Traders: Significant Impact
Day traders typically target 20-50 pips per trade. A 2-pip spread represents 4-10% of the profit target. Manageable, but still meaningful over hundreds of trades.
Swing Traders: Minimal Impact
If you're targeting 100-300 pips over days or weeks, a 2-pip spread is less than 2% of your target. Spreads barely matter at this timescale — execution timing and overall direction matter far more.
Position Traders: Negligible
Holding trades for weeks or months with targets of 500+ pips makes the spread virtually irrelevant. Swap rates (overnight financing costs) become the bigger cost concern.
The takeaway: The shorter your holding period and the smaller your profit target, the more the spread matters. Choose your pairs, broker, and trading times accordingly.
How to Minimise Spread Costs
Trade During Peak Liquidity
The London-New York overlap (13:00-17:00 GMT) offers the tightest spreads on most pairs. Avoid trading majors during the Asian session unless you have a specific reason.
Stick to Major Pairs
EUR/USD, GBP/USD, USD/JPY — these consistently offer the tightest spreads. Trading exotics is fine if your strategy requires it, but understand you're paying a premium.
Use the Right Account Type
If you trade frequently, a raw spread account with commission might be cheaper than a standard account with markup spread. Do the maths for your typical trade frequency and size.
Avoid Trading Around Major News
Spreads can spike 5-10x their normal width during high-impact releases. If your order types include pending orders near current price, they can be triggered at poor levels during these spikes.
Choose Your Broker Carefully
Spread structures vary significantly between brokers. A good broker should offer competitive spreads, transparent pricing, and no hidden markups. Compare average spreads across your target pairs, not just the advertised "from" spreads that only occur under ideal conditions.
Spreads vs Commission: What's Cheaper?
This is one of the most common questions new traders ask, and the answer is: it depends on the numbers.
Spread-only account: EUR/USD with 1.5-pip spread, no commission
- Cost per standard lot round turn: $15
Raw spread + commission account: EUR/USD with 0.2-pip spread, $7 commission round turn
- Cost per standard lot round turn: $2 + $7 = $9
In this example, the raw spread account is 40% cheaper. But not always — some brokers charge high commissions that negate the tight spreads. Always calculate total cost (spread + commission) rather than looking at either number in isolation.
The Hidden Impact: Slippage and Requotes
Spread isn't the only execution cost. Slippage (getting filled at a worse price than expected) and requotes (your order being rejected and re-priced) also affect your bottom line.
Slippage tends to increase when spreads widen — both are symptoms of low liquidity or high volatility. Requotes are more common with market maker brokers during fast markets.
ECN/STP execution typically has less requoting but more slippage, because orders go directly to the market without intervention. Neither model eliminates execution costs entirely; they just distribute them differently.
Bottom Line
The spread is the tax on every trade you place. It's not dramatic, it's not exciting, and that's exactly why so many traders overlook it. But over time, the cumulative effect of spread costs is one of the biggest drags on profitability — especially for active traders.
Understand your spreads. Calculate your total costs. Trade during liquid hours on liquid pairs. Choose an account type that matches your trading frequency. These aren't advanced concepts — they're the basics that separate traders who keep their profits from those who unknowingly give them away.
Compare spreads on a live platform. Open a demo account with ComoFX to see real-time bid-ask pricing across 50+ currency pairs.
