The spread in forex trading refers to the difference between a currency pair’s bid (selling) and ask (buying) prices. It represents the transaction’s primary cost, which the trader pays indirectly to the broker. Unlike a direct commission, the spread is factored into the price displayed on your trading platform.

Understanding Spread In Forex Trading

To understand a spread, you must first be familiar with the two prices quoted for every currency pair:  

• Bid Price: This is the highest price a buyer is willing to pay. It is the price at which you can sell the base currency.  
• Ask Price: This is the lowest price a seller is willing to accept. It is the price at which you can buy the base currency.

The spread is simply the difference between these two prices, and it is measured in pips. For example, if the EUR/USD pair has a bid price of 1.0850 and an ask price of 1.0852, the spread is 2 pips (1.0852 – 1.0850). This means that if you open a buy position, your trade is immediately at a 2-pip loss, and the market must move at least 2 pips in your favor to reach the breakeven point.  

Variable versus Fixed Spreads In Forex Trading

The type of spread you receive will depend on your broker’s pricing mechanism; spreads might be either fixed or variable.

• Fixed Spreads: These spreads don’t change based on the state of the market. They provide predictability, which novices may find helpful. In times of calm markets, they might be marginally wider than variable spreads.
• Variable spreads: also known as floating spreads, are spreads that change according to the liquidity and volatility of the market. During times of high liquidity (such as when the London and New York markets overlap), they can be extremely tight and economical; but, during times of low liquidity or large news announcements, they can expand considerably.

Depending on your trading style and preference for certainty over possibly reduced expenses, you can choose between a fixed and variable spread.

Advantages And Disadvantages Of Fixed Spread In Forex Trading

Advantages

• Predictable Trading Costs: Since the spread never changes, you always know the exact cost of your trade. This makes it easier to calculate potential profits and manage your risk.
• Stability During Volatility: The spread won’t widen during major news events or periods of low liquidity, preventing your stop-loss from being triggered unexpectedly due to a sudden increase in the spread.
• Ideal for Beginners: The predictable nature of fixed spreads allows new traders to focus on their strategy without worrying about fluctuating costs.

Disadvantages

• Higher Overall Cost: Fixed spreads are often wider than the average variable spread during normal market conditions, making them more expensive in the long run.
• Requotes and Delays: In highly volatile markets, brokers may be unwilling or unable to fill your order at the fixed price, leading to a requote, where they offer you a new, less favorable price. This can cause frustration and lost opportunities.

Advantages And Disadvantages Of Variable Spread In Forex Trading

Advantages

• Tighter Spreads: During periods of high liquidity, such as when major trading sessions overlap, variable spreads can be very tight. This can significantly reduce your trading costs.
• Better Execution: Since brokers with variable spreads are usually non-dealing desk brokers, they can fill your order at the best available market price, with less chance of a request.
• Reflection of Market Conditions: Variable spreads provide a transparent view of market liquidity and volatility.

Disadvantages

• Unpredictable Costs: The main drawback is that you can never be certain what the spread will be. It can widen dramatically during news events or periods of low liquidity.
• Risk During Volatility: A sudden widening of the spread can cause a trade to open at a much worse price than expected or cause a stop-loss to be triggered at a less favorable price, a phenomenon known as slippage.

Frequently Asked Questions

How does a broker make money from the spread? 

• The spread is a broker’s primary source of revenue. The broker essentially buys a currency at the lower bid price and sells it at the higher ask price, profiting from the small difference on every transaction.  

Is it better to trade with fixed or variable spreads?

•  There is no single “better” option. Fixed spreads are often preferred by beginners and traders who value predictability. Variable spreads are often preferred by high-volume traders who can take advantage of tighter spreads during favorable market conditions.  

How does market volatility affect the spread? 

• Market volatility, such as during a major news event, can cause spreads to widen. This is because there is less liquidity in the market, making it riskier for brokers to execute trades.  

What is a “raw spread”? 

• A raw spread is the interbank spread without any markup from the broker. Traders with these accounts often pay a small, fixed commission per trade in exchange for extremely tight, variable spreads.  

What is the difference between a spread and a commission? 

• A spread is an indirect cost built into the bid/ask price. A commission is a direct, fixed fee charged per trade, regardless of the spread. Some brokers use both models to generate revenue.  

Do all brokers have the same spreads?

•  No. Spreads can vary significantly between brokers. Factors like the broker’s liquidity providers, account type, and business model all influence the spread offered.