Forex spread
Family IV · Costs
Not to be confused with spread, good spread, spread betting forex.
Forex spread is the gap between the price at which a currency pair can be sold (bid) and the price at which it can be bought (ask). It is the main cost of entering and exiting a position, and it is quoted in pips or as a percentage of the trade value. Spreads vary by broker, currency pair, market conditions and account type.
How the spread works
The bid is the price at which the market is willing to buy the base currency, and the ask is the price at which it is willing to sell. The spread is the difference between these two prices. When a trader opens a buy position, the trade starts at the ask; to break even, the price must move by at least the spread. For a sell position, the trade starts at the bid. Spreads can be fixed or variable, and they tend to widen during periods of low liquidity or high volatility.
Worked example
Suppose EUR/USD is quoted with a bid of 1.1050 and an ask of 1.1052. The spread is 0.0002, or 2 pips. A trader buying 1 standard lot (100,000 euros) enters at 1.1052 and immediately faces a bid of 1.1050, resulting in a loss of 20 USD if the position were closed instantly. This illustrates the spread as a cost.
Factors affecting the spread
Spreads are not uniform across the market. They are influenced by:
- Liquidity: Major pairs such as EUR/USD typically have tighter spreads than exotic pairs.
- Volatility: Spreads often widen during news releases or market opens.
- Broker model: Dealing-desk brokers may offer fixed spreads, while STP/ECN brokers typically provide variable spreads with commissions.
- Account type: Different account tiers may have different spread structures.
Because these factors vary, the spread for a given pair at a given moment is not a universal constant.
Often confused with
- spread
- The forex spread is specifically the bid-ask difference in currency trading, whereas the general term spread can refer to any such difference in any financial instrument; the visible sign is the presence of a currency pair.
- good spread
- A good spread is a qualitative judgement about a spread being narrow relative to typical conditions, while the forex spread itself is the raw measurement; the visible sign is the word 'good' indicating an evaluation.
- spread betting forex
- Spread betting forex is a derivative product where the spread is the stake mechanism and profits are tax-free in some jurisdictions, whereas the forex spread is simply the transaction cost in spot forex; the visible sign is the presence of a bet size rather than a lot size.