What Is Forex Spread, And How To Calculate It?

When you start trading forex, you’ll quickly encounter the term “spread.” The spread is essential in every trade you make. It is the difference between the buying price (ask) and the selling price (bid) of a currency pair. Brokers make money from the forex spread, and it affects your trading costs.

Understanding the spread helps you see how much you pay when you enter a trade and how far the market needs to move in your favor before you start making a profit. If you ignore the spread, you might lose money without realizing it.

In this article, we will explain what the forex spread is, why it matters, and how to calculate it in real trading. We will keep things simple with easy-to-follow examples, so even if you are new to forex, you will understand how spreads affect your trading decisions.

What is the Forex Spread?

In forex trading, every currency pair has two prices: the bid price and the ask price.

• The bid price is the price at which you can sell the currency.
• The ask price is the price at which you can buy the currency.

The spread is simply the difference between these two prices.

For example, let’s say the EUR/USD currency pair shows:

• Bid: 1.1000
• Ask: 1.1002

Here, the spread is 2 pips (the difference between 1.1000 and 1.1002).

This small gap may not look important, but it is the cost of entering the trade. The moment you buy, you are already paying slightly more than you could sell for. That difference is what the broker earns as their fee, and it’s why spreads are sometimes called the “hidden cost” of trading.

The tighter (smaller) the spread, the cheaper it is to trade. That’s why major currency pairs like EUR/USD or GBP/USD usually have very low spreads, while exotic pairs like USD/TRY (U.S. Dollar vs. Turkish Lira) often have much larger spreads.

Types of Forex Spreads (Fixed vs. Variable)

When you trade forex, the spread is not always the same. Depending on your broker and the type of account you use, spreads can be fixed or variable (floating). Understanding the difference helps you choose the right trading style and manage your costs more effectively.

Fixed Spreads

A fixed spread stays the same no matter what happens in the market. For example, if your broker offers a fixed spread of 2 pips on EUR/USD, it will always be two pips, regardless of whether the market is calm or highly volatile.

Advantages of fixed spreads:

• Predictable trading costs (you always know the spread before entering a trade).
• Suitable for beginners who want simplicity.
• Useful in times of sudden volatility when spreads usually widen.

Disadvantages of fixed spreads:

• Usually higher than the lowest variable spreads.
• Brokers may restrict trading during important news events.

Variable (Floating) Spreads

A variable spread changes depending on market conditions. In calm markets, the spread is usually very tight (for example, 0.5 or 1 pip). But during volatile times, such as news announcements, the spread can widen significantly.

Advantages of variable spreads:

• Often cheaper in normal conditions.
• It can be as low as zero pips with some ECN (Electronic Communication Network) brokers.
• More transparent because they reflect real market liquidity.

Disadvantages of variable spreads:

• Unpredictable costs during high volatility.
• Risk of larger spreads when you need to enter or exit quickly.

Which is Better?

There is no “one-size-fits-all” answer.

• If you prefer stability and predictability, fixed spreads may be a better fit for you.
• If you want lower costs in most conditions and don’t mind occasional wider spreads, variable spreads are usually the more intelligent choice.

How to Calculate the Spread in Forex

Learning how to calculate the spread is very important because it tells you exactly how much you are paying every time you open a trade. Luckily, it’s simple once you know how to read a forex quote.

Step 1: Focus on Bid and Ask Prices

When you look at a currency pair on your trading platform, you always see two prices:

• The Bid price, which is the price at which you can sell the pair.
• The Ask price, which is the price at which you can buy the pair.

The spread is simply the difference between these two numbers. It’s the small gap between what buyers are willing to pay and what sellers are asking.

Step 2: Express the Difference in Pips

In the forex market, price changes are typically measured in pips, which are the most minor standard units of movement. For most major currency pairs, one pip equals 0.0001 of a unit.

For example, if EUR/USD is quoted as 1.1000 (Bid) and 1.1003 (Ask), the spread is the difference between these two numbers. Here, the spread is 0.0003, which equals three pips.

Step 3: Translate the Spread into Real Cost

It’s not enough to know the spread in pips—you should also know how much that spread costs you in money. The price depends on the lot size you are trading.

• If you trade one standard lot of EUR/USD, one pip is worth approximately $ 10.
• So, a 3-pip spread means you are paying 30 dollars to open that trade.

This cost is automatically included when you place the trade. That’s why your trade usually starts with a small negative balance the moment it opens—the spread is already deducted.

Step 4: Compare Different Account Types

The actual amount you pay depends on the type of account your broker offers.

• Standard accounts usually have higher spreads, for example, 1.5 to 2 pips on EUR/USD. That means you pay about $15 to $20 per lot just in spread.
• Raw or ECN accounts often show very tight spreads, sometimes as low as 0.1 pip, but they add a commission per trade. Even with the commission, these accounts can be more cost-effective for active traders because the spreads are significantly lower.

Why the Spread Matters for Traders

At first glance, the spread appears to be a minor detail. After all, what difference can one or two pips make? However, in reality, the spread is a hidden cost that every trader incurs on every single trade, and over time, it can add up to a significant difference in your results. That’s why understanding and managing spreads is so essential.

Whenever you open a trade, you don’t start at zero—you immediately start at a slight loss equal to the spread. For example, if you buy EUR/USD and the spread is three pips, your position will begin with a 3-pip loss. The market needs to move at least three pips in your favor before you can even break.

For traders who frequently enter and exit the market, this entry cost has a significant impact. A scalper who takes many trades in one session could pay hundreds of dollars in spreads in just a few hours.

Impact on Different Trading Styles

• Scalpers and day traders: For short-term strategies where profits may be only 5 to 10 pips per trade, spreads are crucial. A large spread can eat up most of your profit.
• Swing traders: For longer-term trades aiming for 100 pips or more, spreads are less noticeable, but they still matter when comparing brokers or account types.
• News traders: During economic announcements, spreads can widen dramatically. This makes trading riskier and more expensive at those times.

Choosing the Right Broker

The spread is one of the primary ways brokers generate income. Some offer wider spreads with no commission, while others provide very tight spreads but charge a separate fee. By comparing spreads across brokers, you can find the one that best suits your strategy and minimizes your costs.

Spreads and Market Conditions

Spreads also tell you something about market conditions. In liquid markets during busy trading sessions, spreads are usually very tight. However, during periods of low liquidity, such as late at night or around major news events, spreads tend to widen. If you’re not careful, you could end up paying far more in trading costs than you expected.

The Bottom Line

Spreads might look small, but they are one of the most critical factors in trading success. By paying attention to spreads, you can:

• Control your trading costs.
• Match your strategy to the correct account type.
• Avoid trading during times when spreads are too high.

Smart traders treat spreads not as a background detail, but as a key part of their trading plan.

Factors That Affect the Spread

The forex spread is not always the same. Sometimes it’s tiny, and other times it can widen dramatically. To manage your costs as a trader, it’s essential to understand what causes spreads to change.

1. Market Liquidity

Liquidity refers to the ease with which a currency pair can be bought or sold without causing significant price changes.

• High-liquidity pairs, such as EUR/USD, GBP/USD, and USD/JPY, typically have the tightest spreads because millions of trades occur every second.
• Low-liquidity pairs, such as exotic currency pairs (like USD/TRY or USD/ZAR), often have significantly wider spreads because there are fewer buyers and sellers actively participating.

2. Time of Day

The forex market operates 24 hours a day, but activity levels fluctuate throughout the day.

• During the London and New York sessions, trading volume is extremely high, and spreads are typically at their narrowest.
• During quiet times, such as late at night in Asia or on weekends, spreads often widen because there are fewer active traders.

3. Market Volatility

Spreads also depend on the market’s level of calmness or instability.

• Stable markets with smooth price action often have very tight spreads.
• Volatile markets, for example, during major news releases such as interest rate decisions or job reports, can cause spreads to widen suddenly. This happens because brokers and liquidity providers protect themselves from rapid price swings.

4. Type of Broker and Account

Different brokers use different models:

• Market maker brokers often offer fixed spreads, which remain relatively stable most of the time.
• ECN or STP brokers offer variable spreads that reflect real market conditions, meaning spreads can be very low in calm markets but widen when volatility increases.

Your account type also matters. Standard accounts may have higher spreads but no commission, while raw or ECN accounts offer tight spreads plus a fixed commission.

5. Economic and Political Events

Global events also affect spreads. For example:

• Elections, unexpected political news, or global crises can reduce market liquidity and increase spreads.
• Scheduled events, such as central bank meetings or economic reports, often cause a temporary widening of spreads before and after the announcement.

6. Currency Pair Characteristics

Not all pairs behave the same.

• Majors (USD, EUR, GBP, JPY, AUD, CHF, CAD) generally have low spreads.
• Crosses (like EUR/GBP or AUD/JPY) have slightly higher spreads.
• Exotics (such as USD/MXN or USD/TRY) typically have wide spreads due to lower trading volumes and higher risk.

How to Manage Spreads as a Trader

Spreads are a cost you can’t avoid in forex trading, but you can learn how to manage them wisely. By being strategic about when and how you trade, you can minimize the amount you pay in spreads and retain a larger portion of your profits. Here are some practical tips:

Trade During the Most Active Sessions

Forex spreads are usually smallest when the market is busy and liquidity is high. This occurs during the London and New York sessions, particularly when they overlap. If you trade during these times, you are more likely to benefit from tight spreads.

On the other hand, trading during quiet times—such as late at night in Asia or just before the market closes—often results in wider spreads. If your strategy doesn’t require trading in those hours, it’s better to avoid them.

Focus on Major Currency Pairs

Major pairs, such as EUR/USD, GBP/USD, USD/JPY, and AUD/USD, are the most heavily traded in the world. Due to their high liquidity, their spreads are typically very low, often less than one pip. Exotic pairs like USD/TRY or USD/ZAR may appear tempting, but their spreads can be as high as 10, 20, or even 50 pips, making them significantly more expensive to trade.

Be Careful Around News Announcements

Big economic news, like interest rate changes, inflation updates, or job reports, often leads to wider spreads. This happens because brokers and liquidity providers change their prices during uncertain times. If your trading strategy doesn’t focus on news events, it’s usually safer to avoid the market just before and after major announcements.

Choose the Right Broker and Account Type

Not all brokers charge spreads the same way. Some offer fixed spreads, while others use variable spreads that change with market conditions.

• If you are a scalper or day trader, look for a broker with tight variable spreads or even raw spread accounts where spreads can be as low as 0.0 pips plus a commission.
• If you trade less frequently and prefer stability, a fixed spread account may be better, as you always know what to expect.

Use the Right Lot Size for Your Strategy

Remember that spreads cost more when you trade bigger lot sizes. If you’re testing a strategy or trading in uncertain conditions, it may be smarter to trade smaller positions so the cost of the spread doesn’t overeat your potential profit.

Build Spreads Into Your Strategy

Good traders don’t ignore spreads—they include them in their planning. For example, if your profit target is 10 pips and your spread is three pips, you need the market to move 13 pips in your favor. By always accounting for the spread in your risk-to-reward ratio, you make sure your strategy is realistic.

Conclusion and Key Takeaways

The forex spread may look like a small detail, but it’s one of the most critical factors in trading. Every time you buy or sell a currency pair, you are paying the spread as the entry cost of your trade. Understanding how spreads work helps you make smarter choices about when to trade, what to trade, and which broker to use.

Here are the key points to remember:

• The spread is the difference between the bid (sell) and ask (buy) price. It is your trading cost.
• Fixed spreads stay the same most of the time, while variable spreads change with market conditions.
• Spreads are lowest on major pairs, such as EUR/USD, and highest on exotic pairs.
• They are usually tightest during the London and New York sessions and widest during quiet or highly volatile times.
• Learning how to calculate spreads in both pips and dollars helps you see the real cost of your trades.
• You can manage spreads by trading at the correct times, focusing on liquid pairs, avoiding high-impact news, and choosing the right account type.

At the end of the day, successful traders don’t just focus on profit—they also pay close attention to costs. By keeping spreads under control, you give yourself a better chance to stay consistent and profitable in the long run. To ensure you are using profitable setups, using a trading journal, such as UltraTrader, is critical. It will help you build a profitable account in the long run.