In forex, the spread is the difference between a currency pair's bid price and ask price. The bid is the price at which you can sell, while the ask is the price at which you can buy. The spread is a trading cost separate from any commission or other fee.
Forex Spread at a Glance
| Term | Meaning |
|---|---|
| Bid price | The price at which you can sell the base currency |
| Ask price | The price at which you can buy the base currency |
| Spread | The ask price minus the bid price |
| Pip | A standard unit for measuring small forex price movements |
| Tight spread | A small gap between the bid and ask |
| Wide spread | A large gap between the bid and ask |
How Is the Forex Spread Calculated?
The formula is:
Spread = Ask price − Bid price
Suppose EUR/USD is quoted as follows:
- Bid: 1.08520
- Ask: 1.08530
The spread is:
1.08530 − 1.08520 = 0.00010
For this quote, that equals 1 pip.
If you buy EUR/USD, the order opens at the ask price of 1.08530. If you sell immediately, it closes at the bid price of 1.08520. The one-pip gap means the position starts with a small loss before commissions, slippage or market movement.
On a 100,000-unit EUR/USD position, one pip is approximately $10. A one-pip spread therefore costs about $10 on that position.
Why Does the Spread Matter?
The spread reduces your potential profit. The wider it is, the further the market must move in your favour before the trade reaches breakeven. Investor.gov describes the bid-ask spread as an inherent cost of trading and notes that wider spreads make buying and selling more expensive.
The cost matters most to:
- Scalpers, who place many short-term trades
- Day traders, who regularly open and close positions
- Traders using large position sizes
- Strategies targeting small price movements
A longer-term trader may feel the effect of a one-pip spread less than a scalper does, but the spread still reduces the trade's overall return.
Do You Pay the Spread When You Buy or Sell?
Yes. You pay the spread through the difference between the price at which you enter and the price available when you exit.
- A buy trade opens at the ask and usually closes at the bid.
- A sell trade opens at the bid and usually closes at the ask.
That is why a new position often shows a small negative profit or loss immediately after execution. The market must move far enough to cover the spread before the position becomes profitable.
What Is a Tight or Wide Spread?
A tight spread means the bid and ask prices are close together. A wide spread means the gap is larger.
Tight spreads generally reflect better liquidity and lower immediate transaction costs. CME Group explains that a tight bid-offer spread lets traders buy or sell at a price closer to the prevailing market price.
Spreads may widen when there is:
- Lower market liquidity
- Fast-moving price action
- A major economic announcement
- Trading outside the most active market hours
- Less trading in a currency pair
- A change in the broker's pricing conditions
The spread may increase quickly as market conditions change. The spread shown when you place an order may therefore differ from the spread available a moment later.
Fixed Spreads Versus Variable Spreads
| Spread type | How it works | Main advantage | Main limitation |
|---|---|---|---|
| Fixed spread | Usually stays within a stated range | Trading costs are easier to estimate | The spread may be wider during normal conditions |
| Variable spread | Changes with liquidity and market conditions | It may be very low during liquid periods | It may widen during volatility |
A variable spread is not automatically cheaper. A broker may advertise a low spread while charging a separate commission. Compare the total trading cost instead of looking at the spread alone.
How Do Brokers Make Money From the Spread?
Many retail forex brokers and dealers include their compensation in the bid-ask spread. Some accounts also charge a separate commission. The Commodity Futures Trading Commission states that retail OTC forex dealers may earn money from spreads, commissions and other fees.
Retail forex is commonly traded over the counter rather than through one central exchange. You trade against a broker or dealer, so prices and spreads may differ between providers.
Is a Lower Spread Always Better?
No. The lowest advertised spread is not always the lowest overall cost.
When comparing brokers or account types, check:
- The spread for the currency pair you trade
- Any commission charged per trade
- The spread during your usual trading hours
- Execution quality and slippage
- Whether the spread is fixed or variable
- The broker's regulatory status and trading conditions
An account with a 0.2-pip spread plus a commission may cost more than an account with a 0.8-pip spread and no commission. The useful comparison is:
Total cost = spread cost + commission + slippage
Does Leverage Reduce the Spread?
No. Leverage does not reduce the spread. It reduces the margin required to control a position, but the spread still applies to the full position size. A larger leveraged position can therefore create a larger dollar cost even when the spread stays the same. Leverage also magnifies potential losses.
Bottom Line
Compare the full cost of trading, not only the advertised spread. Liquid currency pairs often have tighter spreads, while volatile markets, thin liquidity and less active trading hours may produce wider ones.