What Is Spread in Forex?

Although often overlooked, the Forex spread can play an important part in determining the potential profitability of every trade. For a trader, the spread represents a cost involved in entering the market; for a broker, it’s a key source of income.  

So, what is spread in Forex? In this article, we’ll examine this question, explaining what the spread is in trading, how it’s calculated and what causes it to change. Keep reading to find out more!

The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.

Key Takeaways 

• The Forex spread is the difference between the bid price and the ask price. 
• Forex brokers build the transaction cost of a trade into the spread instead of, or in addition to, charging commissions.   
• Spreads fluctuate throughout the trading day, primarily depending on a currency pair’s liquidity and volatility. 

What Is Spread in Forex?

When trading Forex - or any other asset class, for that matter - you will notice that a broker will quote two different prices for every currency pair: the bid price and the ask price.

The difference between these two prices is known as the spread and is a key source of income for brokers, particularly those which don’t charge commissions. 

Essentially, the broker builds the transaction cost into the price of each currency pair by buying from traders for less than the market rate and selling for more than the market rate.

The ask price will always be higher than the bid price, meaning that, if a trader were to open a position and then close it immediately, they would make a loss equal to the value of the spread. 

Consequently, when you open a trade, the market needs to move in the desired direction by the same amount as the spread before your trade can potentially become profitable. 

How to Calculate Spread in Forex

As stated in the previous section, the spread is the difference between the bid and ask prices quoted by a broker.  

Consequently, the spread can be calculated by subtracting the bid price from the ask price. It is typically expressed in pips, with 1 pip equalling 0.0001 (or 0.01 for pairs where the JPY is the quote currency).

Why Does Forex Spread Change?

Forex spreads can either be fixed or variable, although you will find that the majority of online brokers offer variable spreads. 

As the name suggests, variable spreads fluctuate throughout the trading day depending on current market conditions. The width of spreads at any given time are primarily influenced by liquidity and volatility.

• Liquidity: The more liquid a Forex pair – in other words, the more buyers and sellers there are – the tighter the spread. Conversely, when liquidity is low, spreads tend to widen.
• Volatility: During periods of heightened volatility, spreads tend to widen as exchange rates fluctuate more dramatically. 

Liquidity will vary depending on the currency pair in question; for example, major Forex pairs are more heavily traded and, consequently, more liquid than minor or exotic pairs, meaning that their spreads are typically tighter. 

Other factors which can influence liquidity and volatility – and, consequently, spreads – include:

• Time of Day: A Forex pair’s liquidity can be influenced by the time of day. For example, the EURUSD and GBPUSD currency pairs tend to be most heavily traded during the overlap between the London and New York Forex sessions. On the other hand, when both of these markets are closed, liquidity for these currency pairs tends to be lower. 
• Economic Announcements: Volatility can increase dramatically around the times of economic announcements, particularly on occasions where these announcements differ from what the market is expecting.  

Is it Possible to Trade Forex with Zero Spread?

The question you may now be asking yourself is how to avoid spread in Forex. There are Forex trading accounts which offer traders spreads on certain currency pairs starting from zero. 

However, it’s important to note that a broker which offers a spread-free trading account will typically charge a commission per trade instead. It’s also important to bear in mind that other fees, such as swap fees, may still apply.

Consequently, whilst an account might offer spreads starting from zero, the trader will still be paying other fees.

Nevertheless, some traders may prefer to pay commissions in exchange for zero, or significantly tighter, spreads.

The reason for this is that, as we have noted, most Forex brokers charge variable spreads, which fluctuate throughout the day, sometimes unpredictably. On the other hand, commissions tend to be a fixed amount per trade. Subsequently, some traders might prefer the greater predictability that a commission based low spread trading account can offer.  

Please note that all trading accounts carry high risk, especially when trading with leveraged products. Traders should ensure they fully understand the risks and costs involved with trading before getting started.

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