Spread forex
Family IV · Costs
Not to be confused with spread, forex spread, good spread.
Spread forex refers to the gap between the bid (sell) and ask (buy) prices in the foreign exchange market. It is the main cost of trading a currency pair, as traders buy at the ask and sell at the bid. The spread is typically measured in pips, with major pairs often having tighter spreads than exotic pairs.
How the spread works
In any forex quote, two prices are shown: the bid and the ask. 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 simply the ask minus the bid. For example, if EUR/USD is quoted as 1.1050/1.1052, the spread is 0.0002, or 2 pips.
The spread compensates the liquidity provider or broker for facilitating the trade. It can be fixed or variable, depending on the broker and market conditions. Wider spreads are common during periods of low liquidity or high volatility.
Worked example
Suppose a trader buys 1 standard lot (100,000 units) of EUR/USD at an ask of 1.1052 and later sells at a bid of 1.1050. The spread cost is calculated as follows:
The trader pays $20 in spread cost for the round-trip transaction.
Factors affecting the spread
Spreads vary widely across currency pairs and market conditions. Major pairs like EUR/USD and USD/JPY typically have lower spreads due to high liquidity, while exotic pairs and minor pairs often have wider spreads. Spreads also widen during news releases, at market open/close, and during periods of low liquidity. Brokers may offer either fixed or variable spreads, and some charge a commission in addition to a tighter spread.
Often confused with
- spread
- The term 'spread' is a general term for the difference between bid and ask in any financial market, whereas 'spread forex' specifically refers to this difference in the foreign exchange market; the visible sign is the context of currency pairs.
- forex spread
- 'Forex spread' is essentially synonymous with 'spread forex', but the former is often used as a compound noun; the visible sign is the word order, with 'forex' preceding 'spread'.
- good spread
- A 'good spread' is a qualitative judgement about a spread being favourable, while 'spread forex' is the neutral term for the cost itself; the visible sign is the adjective 'good' indicating a positive assessment.