In forex trading, the concept of spreads is fundamental. Every time a trader enters a position, they are dealing with a spread, whether they realise it or not. The spread represents the difference between the buying and selling price of a currency pair, and it directly affects the cost of trading. Understanding how spreads work is crucial for managing trading expenses, choosing the right broker, and optimising trade execution.
In this detailed guide, we will break down what spreads are, how they are calculated, the factors that influence them, and how traders can use this knowledge to make better trading decisions.
What Is a Forex Spread?
In forex trading, currencies are quoted in pairs, such as EUR/USD or GBP/JPY. Each pair has two prices:
Bid Price: The price at which the market (or broker) is willing to buy the base currency. This is the price a trader would receive when selling the pair.
Ask Price: The price at which the market (or broker) is willing to sell the base currency. This is the price a trader would pay when buying the pair.
The spread is the difference between these two prices. It is essentially the cost of opening a trade and is measured in pips (percentage in point), which is the smallest unit of price movement in forex.
Example:
If the EUR/USD currency pair has a bid price of 1.1050 and an ask price of 1.1052, the spread is:
1.1052 – 1.1050 = 0.0002 (or 2 pips).
The spread is how brokers and liquidity providers make money, especially in commission-free trading models.

Types of Forex Spreads
Forex spreads can be broadly classified into two types: fixed spreads and variable (floating) spreads.
1. Fixed Spreads
The difference between the bid and ask price remains constant, regardless of market conditions.
Typically offered by market maker brokers who act as counterparties to traders’ positions.
Suitable for beginner traders who prefer stable costs and want to avoid unpredictable fluctuations.
Can be slightly higher than variable spreads during normal market conditions.
Example: A broker might always offer a 2-pip spread on EUR/USD, even during volatile news events.
2. Variable (Floating) Spreads
The difference between the bid and ask price changes based on market conditions.
Offered by ECN (Electronic Communication Network) or STP (Straight Through Processing) brokers, which connect traders directly to liquidity providers.
Can be lower than fixed spreads during periods of low volatility but may widen significantly during high-impact news releases.
Example: The EUR/USD spread might be 0.5 pips during normal trading hours but increase to 4-5 pips during major economic announcements.
Factors That Influence Forex Spreads
Several factors determine how wide or narrow a forex spread is. Understanding these factors can help you as a trader anticipate changes in trading costs.
1. Market Liquidity
Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price.
Major currency pairs like EUR/USD, GBP/USD, and USD/JPY tend to have lower spreads because they are highly liquid.
Exotic pairs, such as USD/ZAR (US Dollar/South African Rand), have wider spreads due to lower trading volume and higher volatility.
2. Volatility and News Releases
Economic events such as interest rate decisions, GDP reports, and central bank announcements can cause sharp price movements.
During these events, spreads tend to widen as brokers and liquidity providers adjust for increased risk.
Example: The spread on GBP/USD may be 1.2 pips under normal conditions but could spike to 5-10 pips during a major Bank of England announcement.
3. Trading Sessions
The forex market operates 24 hours a day, but different trading sessions have varying levels of liquidity.
The London and New York sessions (when both are open) tend to have the tightest spreads due to high trading volume.
The Asian session typically sees wider spreads, especially for non-Asian currency pairs.
4. Broker Type and Pricing Model
Market Maker Brokers offer fixed spreads but may include markups.
ECN/STP Brokers provide variable spreads and charge commissions per trade.
Traders should carefully choose a broker based on their trading style and cost considerations.

How to Calculate the Cost of a Spread
Traders should always factor in the spread when evaluating potential profits or losses. The cost of a spread depends on the trade size and the number of pips.
Step-by-Step Calculation:
- Identify the Spread: If EUR/USD has a spread of 2 pips, that means you pay a 2-pip cost upon entering the trade.
- Determine Trade Size: A standard lot in forex is 100,000 units of the base currency.
- Calculate the Value per Pip: In a standard lot, 1 pip is worth $10 for most major pairs.
Example Calculation:
You open a 1-lot trade on EUR/USD with a 2-pip spread.
2 pips × $10 per pip = $20 cost to enter the trade.
For a mini lot (10,000 units), the cost would be $2 and for a micro lot (1,000 units), it would be $0.20.
How to Minimise Spread Costs in Forex Trading
1. Trade During High-Liquidity Periods
The best time to trade is during major market overlaps, such as London-New York (12:00 – 16:00 GMT), when spreads are at their lowest.
2. Choose Low-Spread Currency Pairs
Major pairs like EUR/USD and USD/JPY usually have the tightest spreads.
Avoid exotic pairs unless necessary, as their spreads tend to be significantly wider.
3. Use a Broker with Competitive Spreads
Compare different brokers and check their spread structure.
ECN brokers typically offer the lowest spreads but charge commissions.
4. Avoid Trading During High Volatility Events
News releases like Non-Farm Payroll (NFP) reports and interest rate decisions can cause spreads to widen dramatically.
If trading during these times, use limit orders instead of market orders to avoid unexpected execution at unfavourable prices.
5. Monitor Economic Calendars
Keeping track of upcoming economic events can help traders avoid sudden spread increases.
Spreads are an unavoidable cost in forex trading, but understanding how they work can help traders optimise their strategies.
The type of spread (fixed or variable), market conditions, and broker pricing models all play a role in determining trading costs. By trading during high-liquidity periods, choosing the right broker, and managing risk effectively, traders can minimise spread-related expenses and improve their profitability.
If you want to master forex trading and learn how to manage spreads effectively, MS Africa Academy offers expert-led training programmes designed to equip you with real-world trading skills. Join us today and take the next step towards becoming a successful trader!