What Is the Spread in Forex? How to Work Out the Real Cost

What is the spread in forex?

At an airport money counter, you see two prices for the same currency: one to buy and one to sell. The gap between them is how the counter gets paid. Forex trading works the same way.

Every quote has two prices. The bid is the price you can sell at. The ask is the price you can buy at. The spread is the ask minus the bid.

The mid price is halfway between the two, here 1.1001. Some charts show it, but you usually cannot trade at it. If the pair itself is new to you, start with how to read currency pairs.

How do you work out the spread in pips?

Divide the spread by the pip size. For EUR/USD a pip is 0.0001, so 0.0002 ÷ 0.0001 = 2 pips.

Pairs with the Japanese yen use 0.01 as a pip. If USD/JPY is 150.00 bid and 150.03 ask, the spread is 0.03, or 3 pips.

Many platforms show an extra digit, so a spread can be 1.5 pips. Some show the spread in points instead. On many platforms a point is a tenth of a pip, so 20 points means 2 pips. Check what your platform uses.

Most platforms show the bid and ask in a price list, often called a watchlist. Many let you add a spread column too.

How much does the spread cost in money?

Multiply your trade size by the spread. Buy 10,000 euros at 1.1002, sell them straight back at 1.1000, and you get back $2 less than you paid. That is the cost of one round trip, before any other fees.

For USD/JPY, the cost comes out in yen first. On 10,000 US dollars, a spread of 0.03 is 300 yen. At 150 yen per dollar, that is $2.

Small costs add up when you trade often. Twenty round trips a month at 2 pips is 40 pips, or $40 on 10,000 euros. You have to win that back before you make anything.

Spread or commission: which account is cheaper?

Some accounts have wider spreads and no other fee. Others have tiny spreads but charge a fee for each trade, called commission. Accounts sold as raw or zero spread usually work this way.

Compare them using the same trade, such as 10,000 euros of EUR/USD:

• Account A: 2-pip spread, no commission. Cost: $2.
• Account B: 0.4-pip spread, plus $1 to open and $1 to close. Cost: $0.40 + $2 = $2.40.

The smaller spread did not make B cheaper. These are made-up numbers, not real broker prices.

Spreads can be fixed or variable. A fixed spread stays the same in normal times, but it is often wider and comes with its own terms. A variable spread can be tiny when markets are calm and jump when they are not.

Holding a trade overnight and changing currencies can cost extra, too. ASIC's Moneysmart lists these costs for CFDs in Australia. Your own account terms may differ.

Why do spreads change during the day?

A provider sets its prices based on how busy the market is, how uncertain things are and its own costs. So spreads can widen around big news, in quiet hours, on holidays and when systems break down.

Even a busy pair like EUR/USD can have a wide spread for a moment. No hour is always the cheapest, and no spread is always safe. Watch the real pair, provider and time you plan to use.

The forex market hours lesson shows when the main centres are open and why time zones matter.

How can the spread trip you up?

Counting it twice. If you work out a result from your real buy and sell prices, the spread is already in it. Only add it if you used mid prices.

Stops that trigger early. Some charts show only the bid price. If you sold (went short), your stop is triggered by the ask, which is higher. A wider spread can hit your stop even when the chart line does not touch it.

A false break-even. Bought at 1.1002? The bid must reach 1.1002 before you cover the spread. Commission and other fees still count; check your provider's order rules.

Can you work out this cost?

Try this made-up trade: 5,000 euros of EUR/USD, a 3-pip spread, and $0.50 commission each way.

Got a different answer? Check the trade size, the pip size and both commission charges.

Next lesson: margin and leverage, which decide how big a trade you can open. Spreads also change with the time of day, so read forex market hours too. To compare providers, see comparing brokerage fees and our forex broker guide. And always include costs when you backtest a strategy.