What is Spread?
The spread is the difference between the buy price (ask) and the sell price (bid) of a currency pair. It is the primary way brokers earn revenue on standard accounts — and it represents your immediate cost every time you open a trade.
When you look at a quote like EUR/USD 1.1050/1.1052, the spread is 2 pips. You automatically start a trade 2 pips "in the red," meaning the market must move 2 pips in your favor before you break even.
Spread may seem like a small number, but it compounds significantly for active traders who place dozens of trades per week.
Bid and Ask Price
Every forex quote has two prices:
| Price | Definition | Who Uses It |
|---|---|---|
| Bid | The price the broker buys from you (you sell at this price) | When you SELL a currency pair |
| Ask | The price the broker sells to you (you buy at this price) | When you BUY a currency pair |
Example:
- EUR/USD quote: 1.10500 / 1.10520
- Bid = 1.10500 (you sell at this)
- Ask = 1.10520 (you buy at this)
- Spread = 0.00020 = 2 pips
The broker buys low and sells high — the difference is their profit. You always buy at the higher Ask price and sell at the lower Bid price.
Fixed vs Variable Spread
Brokers offer two main types of spreads:
Fixed Spread:
- Stays the same regardless of market conditions
- Example: EUR/USD always at 2 pips
- Predictable costs, good for planning
- Usually slightly wider during normal conditions
- Common on market maker (dealing desk) broker models
Variable (Floating) Spread:
- Changes based on market liquidity and volatility
- During calm markets: EUR/USD might be 0.1–0.5 pips
- During news events or low liquidity: can widen to 10–30+ pips
- XM uses variable spreads on Ultra Low accounts (avg. 0.6 pips on EUR/USD)
| Condition | Fixed Spread | Variable Spread |
|---|---|---|
| Normal market | 2 pips | 0.3–0.8 pips |
| Major news release | 2 pips | 5–20 pips |
| Weekend/low liquidity | 2 pips | 2–5 pips |
| Best for | Beginners, news traders | Scalpers, quiet markets |
How to Minimize Spread Costs
Every pip you pay in spread is a direct cost. Here's how to reduce it:
1. Trade Major Pairs: EUR/USD, GBP/USD, USD/JPY consistently have the tightest spreads (0.1–1 pip). Exotic pairs like USD/TRY or USD/ZAR can have spreads of 20–50 pips.
2. Trade During High Liquidity Hours: The London–New York overlap (13:00–17:00 GMT) has the highest trading volume and tightest spreads. Avoid trading during the Asian session for major USD pairs.
3. Choose the Right Account Type: ECN or Raw Spread accounts offer near-zero spreads but charge a fixed commission per lot. For traders executing many trades, this is usually cheaper overall.
4. Avoid Trading Around Major News: Spreads spike around events. Either close positions before news or wait for spreads to normalize.
5. Compare Brokers: Spread differences between brokers add up. On EUR/USD, the difference between a 1-pip and 0.2-pip spread is $8 per standard lot — meaningful for active traders.
Understanding spread empowers you to calculate your true trading costs and choose the best market conditions to maximize your edge.