The spread is the difference between the bid (buy) and ask (sell) price of a currency pair. It’s the primary cost of trading and how market makers earn revenue.
How Spread Works
EUR/USD quote: 1.0850 / 1.0852
- Bid: 1.0850 (what buyers offer)
- Ask: 1.0852 (what sellers want)
- Spread: 2 pips (1.0852 - 1.0850)
Spread Cost Calculation
Formula: Cost = Spread (pips) × Pip Value × Lot Size
1 standard lot EUR/USD, 1.5 pip spread:
- Cost = 1.5 × $10 × 1 = $15
Fixed vs. Variable Spread
| Fixed | Variable | |
|---|---|---|
| Consistency | Always same | Changes with market |
| During news | Same | Widens |
| Cost | Usually higher | Usually lower |
| Broker type | Market maker | ECN/STP |
Typical Spreads
| Pair | Normal | News Events |
|---|---|---|
| EUR/USD | 0.6-1.2 pips | 3-10 pips |
| GBP/USD | 1.0-2.0 pips | 5-15 pips |
| USD/JPY | 0.7-1.2 pips | 3-8 pips |
| Exotic pairs | 5-50 pips | 50-200+ pips |
Key Points
- Lower spread = lower trading cost
- Spreads widen during low liquidity and news events
- Compare total cost: spread + commission
- Active traders should prioritize low-spread brokers