Understanding Forex Spreads and Trading Costs

The spread is the difference between the bid and ask price and represents the primary cost of forex trading. Understanding spreads helps you minimize costs and choose optimal trading times.

How Spreads Work

If EUR/USD shows: Bid 1.0850 / Ask 1.0852

• The spread is 2 pips (0.0002)
• You buy at 1.0852 (ask price)
• You sell at 1.0850 (bid price)
• You need price to move 2 pips just to break even

Types of Spreads

Fixed Spreads

Stay constant regardless of market conditions. Useful for budgeting costs but often wider than variable spreads in normal conditions.

Variable Spreads

Fluctuate based on market liquidity. Typically tighter during high-liquidity periods but can widen dramatically during news events or low-liquidity times.

When Spreads Widen

• Major news releases (NFP, central bank decisions)
• Market open/close transitions
• Low liquidity periods (Asian session for EUR/USD)
• Extreme market volatility
• Weekend gaps

Minimizing Spread Costs

1. Trade during high-liquidity sessions
2. Avoid trading during major news releases
3. Choose brokers with competitive spreads
4. Trade major pairs (EUR/USD, USD/JPY) for tightest spreads
5. Consider your trading style—spreads matter more for scalpers than swing traders