Forex Spreads: Function, Calculation and Impact on Trading

Now that we know how currencies are quoted in the marketplace, let’s look at how we can calculate their spread. Forex quotes are always provided with bid and ask prices, similar to what you see in the equity markets. Trading Forex, Futures, Options, CFD, Binary Options, and other financial instruments carry a high risk of loss and are not suitable for all investors. 60-90% of retail investor accounts lose money when trading CFDs with the providers presented on this site.

Broker Provider

In this example, the first currency (GBP) is known as the base currency, and the second currency (USD) is known as the quote currency. If the GBP/USD exchange rate is currently trading at 1.3, it means that to purchase one U.S. dollar, you will need to pay 1.3 British pounds. Understanding how to read a spread in forex along with factors that affect the spread will help you be a better trader. The question of which is a better option between fixed and variable spreads depends on the needs of the trader. Typically, spreads widen during economic data releases as well as other periods when the liquidity in the market decreases (like during holidays and when the zombie apocalypse begins). Instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair you want to trade.

Events and Volatility

Highly liquid pairs like EUR/USD have low spreads since they don’t come with as much volatility. For instance, EUR/ZAR doesn’t see much trading activity, resulting in less favorable spreads for traders. And traders with larger accounts who trade frequently during peak market hours (when spreads are the tightest) will benefit from variable spreads.

• Oh, and spreads may also widen when Trump randomly tweets about the U.S. dollar when he was still the President.
• Major pairs such as EUR/USD, GBP/USD, and USD/JPY benefit from high liquidity, allowing brokers to offer spreads as low as zero pips.
• Forex market investing involves trading one currency in exchange for another at a preset exchange rate.
• Since these traders are paying the spread so many times throughout the day, it’s absolutely imperative that they minimise the cost of the spreads they need to pay.

For instance, when major trading sessions like the European and U.S. sessions overlap, the spreads may narrow. This can be attributed to increased liquidity, so you have a chance to optimize your trades. The spread is a crucial piece of information to be aware of when analyzing trading costs.

What Is the Bid-Ask Spread?

A wider bid-ask spread means that a customer would pay more when buying and receive less when selling. In other words, each forex broker can charge a slightly different spread, which can add to the costs of forex transactions. On certain occasions, there are unscrupulous brokers who exercise this practice to obtain more profits.

While active traders usually prefer raw spreads, these types of spreads have a greater quantity of fees. The time of the day will also affect spreads since the market is more active during some forex trading hours and days than others. Spreads are tighter when there are more market participants and financial markets greet the most participants from 8 a.m. That’s the overlap between the New York and London market sessions. Tuesday, Wednesday and Thursday also have lower spreads than Mondays and Fridays. Fixed spreads preserve the same difference between the bid price and the ask price regardless of how much an asset moves.

• If a customer initiates a sell trade with a broker, the bid price would be quoted.
• To help you find the right broker that suits you, we reviewed and compiled a list of the best no-spread brokers available right now.
• It displays the buying and selling prices, along with the spread value.
• Some traders get stuck with variable spreads that widen dramatically shortly after they have entered the position.
• The four steps for calculating spreads in Forex trading are listed below.

As a result, the size of the spread in institutional trading increases significantly. Floating spreads are the most common type because they adjust to market conditions. Normally, they stay within 4-5 points but can widen to points during high volatility.

A wider spread usually comes with a higher level of risk, so you should consider the management before opening a position. The spread is the cost of each transaction that the broker charges and determines if that cost is appropriate for your trading strategies. Many scalpers will be in and out of the market anywhere from 5 to 30 times each trading day. Since these traders are paying the spread so many times throughout the day, it’s absolutely imperative that they minimise the cost of the spreads they need to pay. Most forex volume is traded around the opening time of major global financial cities. Currency spreads are measured in pips, which is the smallest unit that a currency can move.

A high spread means that traders pay their FX brokers a higher transaction cost for each trade, leading to lower profitability. A low spread is better because it leads to lower transaction costs and potentially higher profitability. A spread cost simply represents the transaction cost for an instrument. Instead of charging a separate trading fee for when traders place an order, the cost is instead built into the buy and sell price.

As both benchmarks increase, BRENT yields a profit of $34.23, while WTI incurs a loss of $30.12, resulting in a $4.11 overall profit. To profit from a narrowing spread, analyse asset movement and identify average price differences. If you increase your position size, your transaction cost, which is reflected in the spread, will rise as well. The widened spreads can quickly eat into any profits that the scalper makes. So if you try to enter a trade at a specific price, the broker will “block” the trade and ask you to accept a new price. Filippo Ucchino has developed a quasi-scientific approach to analyzing brokers, their services, offers, trading apps and platforms.

Let’s examine the effects of forex spreads on a few common types of forex trading strategies. The bid-ask spread in Forex trading also directly affects how traders think and make critical trading decisions. For instance, most traders choose the brokers with the tightest spreads and mainly trade the major Forex currency pairs like EUR/USD because they have tighter spreads due to high liquidity.

Top 10 Strongest Currencies in the World in 2025

Second is volatility, which measures how “big” a currency pair’s price fluctuates over a period of time. This also means that the first currency pair overall has a wider (higher) spread than the second pair. Spreads can either be wide (high) or tight (low) – the more pips derived from the above calculation, the wider the spread. Traders often favor tighter spreads, because it means the trade is more affordable.

What Spreads Depend On

You can find the BID and ASK prices in the transaction window of LiteFinance broker’s app. To capitalize on a widening spread, identify moments when the asset value difference is narrowest. In this position, sell the cheaper asset and buy the more expensive one. Spread is the difference between the bid price and the ask price, while pips are a measurement of that difference. Low spreads are better for traders since it’s easier for them to break even on their positions. Raw spreads are what you get if you have direct access to interbanks.

Forex Spread Meaning, Types, Size and How to Calculate It

If you are swing trading, use liquid assets, as they tend to have narrower spreads. WR Trading is not a broker, our virtual simulator offers only simulated trading of a demo account. Prices, market execution can be different from real market situations. Trading Futures and Options on Futures involves a substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. Opinions, market data, and recommendations are subject to change at any time.

Fixed spreads have smaller capital requirements, so trading with fixed spreads offers a cheaper alternative for traders who don’t have a lot of money to start trading with. Commission-based spreads usually demand a separate commission fee on trades in addition to the usual ask/bid spread. Some brokers charge you a commission on every trade you make instead of widening spreads. European trading, for example, opens in the wee hours of the morning for U.S. traders, while Asia opens late at night for U.S. and European investors.

Also, apply position sizing to ensure spread costs are proportional to your account size. A forex spread is the difference between the ask and the bid price of a currency pair. One forex spread meaning of the factors that you need to consider when selecting a broker is regulatory compliance.

Forex traders profit from spread changes in various market conditions. Comparing assets like UKBrent and WTI, popular oil benchmarks, reveals price differences. Historically, BRENT has been pricier than WTI, with a $3-$5 average difference. Every forex spread is either a fixed spread or a variable spread. You can still profit from forex trading if you hold an asset long enough for the bid and ask prices to move in your favor. However, if you buy and sell a forex position within a microsecond, you will get burned by the spread, especially if there is a big gap between the bid price and the ask price.