What Is Spread in Forex Trading and How to Calculate It

The spread in forex trading represents the core cost you pay every time you enter a trade. It is the difference between the bid and ask prices quoted by your broker for a currency pair. Understanding what spread means in forex directly impacts your profitability, as it acts like a hidden fee that must be overcome before any trade turns positive.

Many new traders overlook spreads, focusing instead on big market moves. Yet spreads add up quickly, especially for frequent trades. This guide breaks down the bid-ask spread in forex, shows how to calculate it step by step, and shares practical ways to minimize costs.

By the end, you‘ll know how to spot tight spreads, avoid common pitfalls, and choose conditions that keep trading costs low. Whether you’re scalping or swinging positions, mastering spreads sharpens your edge.

What Does Spread Mean in Forex?

Spread in forex trading is the gap between the bid price—where the broker buys from you—and the ask price—where the broker sells to you. This bid-ask spread in forex forms your immediate trading cost, as you buy at the higher ask and sell at the lower bid.

Brokers profit mainly from this spread rather than commissions on many accounts. A tight spread, like 1 pip on EUR/USD, means lower entry costs; a wider one, say 5 pips on an exotic pair, raises the bar for break-even. What does spread mean in forex? Simply, it‘s the broker’s cut baked into every quote.

Lower spreads improve your odds, but theyre not free—market conditions dictate them. Traders chasing “zero spreads” often miss that true market pricing includes natural gaps.

Bid and Ask Prices Explained

The bid price is the level at which the market will buy your currency pair, while the ask price is where it sells to you. You enter long trades at the ask and close them at the bid; shorts reverse this.

Take EUR/USD quoted as bid 1.1000 / ask 1.1002. You buy euros at 1.1002 (ask) but sell them back at 1.1000 (bid).

Bid: 1.1000Ask: 1.1002 Spread: 0.0002 (2 pips)

This setup ensures the spread—what is spread in forex trading at its core—exists from the start. Every quote shows both prices live on platforms like MT4.

What are Pips and Points?

A pip, short for “percentage in point,” measures the smallest standard price change in forex. For most pairs like EUR/USD, it‘s the fourth decimal place (0.0001); for JPY pairs like USD/JPY, it’s the second (0.01).

Fractional pips, or pipettes, add a fifth decimal for precision (e.g., 1.10005). Spreads quote in pips, so a 1.5-pip spread means 0.00015 on EUR/USD.

EUR/USD from 1.1000 to 1.1001 = 1 pip. USD/JPY from 145.00 to 145.01 = 1 pip. Traders track spreads and profits in pips for easy comparison across pairs.

How to Calculate Forex Spread

Calculate spread in pips by subtracting bid from ask, then converting the difference. Formula: Spread (pips) = (Ask - Bid) / Pip size.

EUR/USD bid 1.1000, ask 1.1003: 1.1003 - 1.1000 = 0.0003, or 3 pips.

Steps to calculate:

• Note bid and ask prices.
• Subtract: Ask - Bid.
• Divide by 0.0001 (for non-JPY pairs) for pips.
• For cost: Multiply pips by pip value.

For 1 standard lot (100,000 units) EUR/USD (~1.10), pip value ≈ $9.09. A 3-pip spread costs ~$27.30 upfront—your trade opens 3 pips in the red. Break-even requires the market to move 3 pips your way first.

View spreads in your platforms Market Watch or order window for real-time pips or currency cost.

Types of Forex Spreads

Fixed spreads

Fixed spreads stay constant regardless of market conditions, often from market maker brokers. Theyre predictable, ideal for planning exact costs.

Pros: No surprises during volatility. Cons: Often wider (e.g., 2 pips minimum) than variable in calm markets.

Variable or Floating Spreads

Variable spreads fluctuate with liquidity and volatility, tightening in busy sessions (0.5 pips) but widening during news (10+ pips). Common in ECN/STP models.

They mirror interbank rates but spike when liquidity drops.

Raw Spread and Commission Models

Raw spreads start near 0.0 pips but add commissions (e.g., $3–$7 per lot round-turn). Total cost: spread + commission, often lower than fixed for high-volume traders.

Compare full costs— a 0.1-pip raw + $6 commission might beat a 1.5-pip fixed.

Factors that Affect Spread Size

Liquid majors like EUR/USD, GBP/USD have tight spreads (0.5–1 pip) due to high volume. Exotics like USD/TRY widen to 20+ pips from low liquidity.

London-NY overlap (8 AM–12 PM ET) narrows spreads; Asian sessions or holidays widen them.

News like NFP or Fed decisions spike volatility, dropping liquidity and ballooning spreads 5–10x temporarily. ECN brokers pass raw market spreads; market makers may hedge wider ones.

Why Spread Matters for Traders

Spread is your primary trading cost alongside swaps/commissions, eating into every win. A 2-pip spread on 10 daily trades costs 20 pips—equivalent to a full trend days move.

High spreads demand bigger wins to break even; scalps targeting 5 pips need 7+ pip moves with 2-pip spreads. Low-spread scenario: 2-pip cost on 10-pip target = 80% net. High-spread (5 pips): only 50% net.

Frequent traders feel it most—spreads turn marginal edges negative over time.

How to Find and Compare Spreads

Check live bid/ask in MT4/5 Market Watch or order panels. Demo accounts show typical spreads; live trading reveals averages.

Ads tout “from 0.0 pips,” but check historical averages (e.g., Pepperstone Razor ~0.1 pips EUR/USD). Compare brokers at the same time via tools like Myfxbook.

Reducing Your Spread Costs

• Trade majors (EUR/USD) over exotics for inherent tightness.
• Hit London-NY overlap; skip thin hours.
• Weigh raw + commission vs. fixed for your volume.
• Skip news releases if spikes hurt.
• Size positions so spread < 10–20% of stop-loss distance.

Monitor via platform; dont chase lowest spreads ignoring execution/slippage.

Common Mistakes About Forex Spreads

• Ignoring spreads in backtests: Use realistic averages, not zero.
• Chasing “zero spread” ads: They hide commissions or conditions.
• Setting stops/targets without a spread buffer: A 20-pip stop effectively becomes 22 with a 2-pip spread.
• Trading illiquids/news blindly: Widens erase edges.

Fix: Log actual spreads; adjust plans accordingly.

Spread and Trading Strategies

Scalping/day trading hates wide spreads—even 1 extra pip kills 20% of tiny targets. Favor raw ECN accounts.

Swing/position styles tolerate spreads better per trade, but volume matters yearly. Backtest with real spreads (e.g., 1.5 pips avg) to validate reward:risk.

Bottom Line on Forex Spread

Spread means the bid-ask gap—your unavoidable trade cost in pips or dollars. It dictates break-even and profitability, widening on low liquidity or news.

Key actions: Calculate via ask-bid subtraction, trade liquids during peaks, compare total costs across brokers, buffer plans for reality.

Audit your journal: Tally spread drag, tweak times/pairs. Small cuts compound into serious edge—efficient trading starts here.