A spread is the difference between the buy price and sell price of a currency pair, and it's the main cost you pay when you trade forex.

When you look at a forex quote, you see two prices: the bid price (what buyers will pay) and the ask price (what sellers want). The spread is the gap between them. If EUR/USD shows a bid of 1.0850 and an ask of 1.0852, your spread is 0.0002, or 2 pips. That gap exists because the market maker or broker needs to profit from facilitating your trade, and it's how they make money instead of charging you a flat commission.

The spread is measured in pips, which is the smallest price move in forex. For most currency pairs, one pip equals 0.0001. On some pairs like USD/JPY, one pip is 0.01 because the yen is quoted differently. The smaller the spread, the less it costs you to enter and exit a trade.

Key Takeaways

  • A spread is the difference between the bid price (buy) and ask price (sell), measured in pips, and represents your cost to open a trade.
  • Tighter spreads (smaller gaps) cost you less money per trade, while wider spreads eat into your profit or increase your loss.
  • Major currency pairs like EUR/USD typically have the tightest spreads because they trade in high volume; exotic pairs have wider spreads.
  • Spreads widen during low-liquidity times (early morning, holidays, economic news) and narrow during peak trading hours when more buyers and sellers are active.
  • Your broker's spread is fixed or variable depending on the account type, and some brokers add a markup on top of the market spread.

Why spreads exist and who profits from them

A forex broker or market maker sits between you and the interbank market. When you buy EUR/USD at the ask price, the broker has already bought it at a slightly lower bid price from their liquidity provider. That tiny difference is their profit. Without spreads, brokers would have no reason to offer you trading access, so the spread is the mechanism that keeps the market running.

The spread also reflects the cost of liquidity. In forex, liquidity means how easily a currency pair can be bought or sold without moving the price. Major pairs like EUR/USD, GBP/USD, and USD/JPY trade in enormous volume every second, so there are always buyers and sellers ready. That competition keeps spreads tight. Exotic pairs like USD/TRY or USD/ZAR have fewer traders, so spreads widen because the broker takes on more risk holding the position.

How spreads affect your profit and loss

Every time you open a trade, you start in a hole equal to the spread. If you buy EUR/USD with a 2-pip spread, the price has to move 2 pips in your favor just for you to break even. If you sell, the same rule applies in reverse. On a standard lot (100,000 units), each pip is worth $10, so a 2-pip spread costs you $20 before you've made a single profitable move.

This matters most for scalpers and day traders who make many trades per day and rely on small price moves. A trader making 20 trades a day with a 3-pip spread pays 60 pips total in spread costs. Over a month, that's a real drag on returns. Swing traders holding positions for days or weeks care less about the spread because they're betting on larger price moves. Position traders holding for weeks or months barely notice it.

Fixed spreads versus variable spreads

Some brokers offer fixed spreads, meaning the gap between bid and ask stays the same whether the market is calm or chaotic. A fixed 2-pip spread on EUR/USD remains 2 pips even during volatile news events. This is predictable, but fixed spreads are usually wider than variable spreads during normal conditions because the broker is protecting themselves against the risk of sudden moves.

Other brokers offer variable spreads, which tighten and widen based on market conditions. During peak hours when liquidity is high, variable spreads might be 1 pip. During low-liquidity times like early morning or holidays, they might jump to 5 or 10 pips. Variable spreads are tighter on average, but you face the risk of a sudden widening right when you want to enter or exit a trade.

When spreads get wider and what causes it

Spreads widen when liquidity dries up. This happens during off-peak trading hours (late evening in New York, early morning in Asia), on weekends when markets are closed, and during major economic announcements like central bank decisions or employment reports. When traders are uncertain and liquidity providers pull back, the bid-ask gap expands to compensate for the risk.

Geopolitical events, market crashes, and currency crises also widen spreads dramatically. During the 2020 COVID market panic, spreads on major pairs widened to 10 or 20 pips—far above normal. If you're trading during these windows, you're paying a much higher cost to enter and exit. Many traders simply close their platforms and wait for spreads to normalize rather than trade through the chaos.

Comparing spreads across brokers and account types

Different brokers quote different spreads on the same currency pair because they source liquidity from different providers and use different business models. One broker might offer EUR/USD at 1.5 pips while another quotes 2.5 pips. Over hundreds of trades, that difference adds up. It's worth checking the spreads a broker advertises for the pairs you actually trade, not just the headline "from 0.1 pips" claim that applies only to the most liquid pair at the best time of day.

Account type matters too. A broker's standard account might have spreads of 2 to 3 pips, while a premium or professional account offers tighter spreads of 0.5 to 1.5 pips—but usually requires a higher minimum deposit or monthly fees. Some brokers use a markup model, where they add a fixed amount on top of the interbank spread. Others use a commission model, charging you a flat fee per trade instead of a spread. Commission-based accounts often have tighter spreads because the broker makes money from the fee, not the gap.

How to minimize spread costs

Trade major pairs. EUR/USD, GBP/USD, USD/JPY, and USD/CHF have the tightest spreads because they're the most liquid. If you're trading exotic pairs, expect to pay 5 to 10 times wider spreads. If your strategy works on major pairs, stick there.

Trade during peak hours. The London and New York sessions (roughly 8 a.m. to 5 p.m. Eastern Time) have the most liquidity and tightest spreads. If you're trading from Asia or Australia, you'll face wider spreads during your local morning when the market is thin.

Avoid trading around major economic news. Central bank announcements, employment reports, and GDP releases cause spreads to spike. If you must trade these events, use limit orders instead of market orders so you control the price you accept, rather than getting filled at whatever the spread is at that moment.

Choose your broker carefully. Compare the spreads three or four brokers quote on the pairs you trade, and factor in whether they charge commissions or markups. A broker with a 1-pip spread plus $5 per trade might cost more than a broker with a 2-pip spread and no commission, depending on your trade size and frequency.

Frequently Asked Questions

What's the difference between pips and spreads?

A pip is a unit of measurement—the smallest price move in forex. A spread is measured in pips and represents the cost to enter a trade. If EUR/USD moves from 1.0850 to 1.0851, that's a 1-pip move. If the spread is 2 pips, you pay 2 pips just to open the position.

Can spreads go negative?

No. A spread is always positive because the ask price is always higher than the bid price. If they were equal, there would be no incentive for anyone to facilitate the trade. Some brokers advertise "negative spreads" or "rebates," but what they mean is they're crediting you back part of the spread as a reward for trading volume.

Do I pay the spread once or every time I trade?

You pay the spread every time you open a trade. If you buy EUR/USD and then sell it an hour later, you pay the spread twice—once to enter, once to exit. That's why frequent traders are more sensitive to spread costs than long-term traders.

Why do some brokers advertise spreads starting at 0.0 pips?

Those spreads apply only to the most liquid pair (usually EUR/USD) during the best market conditions (peak London or New York hours). Your actual spreads on other pairs or at other times will be wider. Always check the average spread, not the minimum.

Does a wider spread mean the broker is dishonest?

Not necessarily. Wider spreads reflect real market conditions—low liquidity, high volatility, or exotic pairs. A broker offering 1-pip spreads on USD/ZAR during Asian hours would be taking on huge risk and would likely go out of business. Wider spreads on illiquid pairs are normal.