Meaning of Spread in Forex: Everything You Need to Know
Mar 07 2025
What is spread in forex trading and why is it so important to your bottom line as a trader? Understanding the meaning of spread in forex trading is vital for cost-effective trading.
Platforms like STIC Cashback are useful for minimising the impact of wider forex spreads with valuable rebates that can offset your trading costs.
Within this guide, we explain what FX spread is in greater detail and how to calculate spread in forex markets.
What is a Forex Spread?
Our forex spread definition should help make things clearer for you. Put simply, it’s the difference between the bid price – the price at which brokers are prepared to sell a currency pair – and the ask price – the price at which you can purchase a currency pair. The gap represents the cost of opening a forex trade, which is paid to your forex broker for opening your position.
Spreads have an important role in the forex trading ecosystem. For brokers, they can act as a revenue source alternative to commission charged per trade. For traders, they can have a direct impact on your profitability, with wider spreads leading to more expensive trades. At the other end of the spectrum, narrow spreads allow you to retain more of your trading capital.
There are two types of forex spreads to get your head around:
- Fixed Spreads
Some forex brokers will offer fixed spreads. This means the gap between the bid and ask prices remains the same no matter the market conditions. Fixed spreads are most popular among market maker brokers. - Variable Spreads
Variable forex spreads are the alternative from some brokers. They tend to tighten during periods of high trading liquidity and widen during periods of low trading liquidity. They may also widen during periods of market uncertainty, where price volatility is stronger than usual.
How to Calculate Spread in Forex?
It’s easier than you might think to determine the spread of a forex pair. In fact, you can express it in three simple steps:
- Note the current bid and ask prices
Write down the bid price and the ask price of the forex pair you’re interested in trading. They should be displayed clearly on your chosen trading platform. - Deduct the current bid price from the ask price
Subtract the bid price from the ask price. The divergence between the two prices is the spread in the base currency. - Note the spread size in pips
To make things even easier to digest, you could then convert the divergence into pips. A pip generally goes to the fourth decimal place in most influential forex pairs.
Let’s take a quick look at USD/ZAR and determine how you’d calculate the available spread for this currency pair.
Bid Price: 18.6819
Ask Price: 18.6906
Spread = Ask Price – Bid Price
18.6906-18.6819 = 0.0087 (87 pips)
Factors That Influence a FX Spread
The size of an FX spread is determined by multiple elements which forex brokers monitor daily. You should understand each factor to take better control of your trading costs too:
- Trading liquidity
Major forex pairs like EUR/USD and GBP/USD will often have the tightest spreads due to the sheer volume of money waiting on each side of the order book to buy or sell. The abundant supply and demand gives brokers the confidence to offer narrow spreads. However, exotic, less liquid forex pairs – including USD/ZAR – will often have wider spreads since there are more fluctuations in supply and demand within the market. - Price volatility
Some forex brokers will widen their forex spreads to prepare for influential macroeconomic updates or reports. They’ll do so to mitigate the likelihood of fast price movements as traders digest the latest news or data affecting an economy. At this point, it becomes more expensive to enter or exit positions. - Time
The forex trading market operates on a 24/5 schedule every week. However, spreads may vary depending on the time of the day. You can expect tighter spreads during the London trading session, as well as the New York trading session, when liquidity is likely to be at its peak. Spreads may widen during the Asia session or during the overlap between trading sessions when liquidity thins out. - Broker pricing models
Each forex broker will have their own pricing model to abide by. Market maker brokers will offer bigger but fixed spreads which offer greater certainty at a slightly higher cost. Meanwhile, Electronic Communication Network (ECN) brokers will offer variable spreads which align with the latest market conditions.
Why Forex Spreads Matter to Traders
Put simply, forex spreads can greatly impact your trading costs and ultimate profitability in the markets. If you’re a scalper, taking small but frequent trades in the forex market, wider spreads can sometimes inhibit your scalping strategy. In periods of high volatility, it can erode much of the profit generated by a trade.
Comparing spreads across the leading forex brokers is vital for capping your trading costs. Each broker has their own approach to spreads based on their pricing models and market access. ECN brokers typically offer tighter spreads but may charge commissions per trade instead. Meanwhile, market maker brokers may offer wider, fixed spreads with zero commission.
Ultimately, it’s about finding the sweet spot for your forex trading strategy. Be sure to factor spreads into your forex trading matrix, aligning with brokers that fit best with your trading style for cost-efficient execution.
How STIC Cashback Can Help Reduce Trading Costs
One way you can counterbalance the impact of wider forex spreads is to partner with one of our supported forex brokers at STIC Cashback.
If you choose to deposit using STICPAY and trade with any of our partnered brokers, you’ll be eligible to claim cashback based on your trading volume. The more you trade on selected forex pairs, the bigger the rebate you’ll receive. You don’t even have to worry about your broker opting not to pay your rebate, since STIC Cashback covers the entire process.
Our latest cashback promotions can potentially lower the cost of your forex spreads, improving your overall profitability.
Tips for Managing a Spread in Forex
If you’re keen to trade the forex markets optimally, managing spreads effectively is vital for looking after your trading capital. Here are some actionable hints and tips to guide you:
- Pick a broker with competitive spreads
Make sure you choose a forex broker that’s renowned for offering some of the tightest spreads across the spectrum of major, minor and exotic forex pairs. Since forex spreads are variable, brokers will alter their spread based on their operating models. Some will look to attract high volumes of traders with tighter spreads, while those with wider spreads may offer alternative benefits to entice more experienced forex traders. - Try to trade during periods of high liquidity
Remember, forex spreads typically tighten when trading liquidity is at its highest. So, where possible, try your best to trade forex pairs during major market sessions led by London or New York. Narrower FX spreads can minimise your costs per trade. - Keep a close eye on market conditions
High volatility on forex pairs is often caused by macroeconomic factors like news or geopolitical events. Keep tabs on the biggest events within a daily or weekly trading calendar. Avoid trading during this time unless you’re confident you know the direction a forex pair is heading and you can manage your risk accordingly.
Forex Spreads FAQs
What determines the spread in forex trading?
A forex spread is the gap between the exchange rate a forex broker sells a fiat currency and the price at which the broker is prepared to buy it. An FX spread is variable rather than fixed. The spread may rise following a crucial news release or event which causes the price of the forex pair to be more volatile.
What are the disadvantages of a high FX spread?
The wider the spread of a forex pair, the further your entry position must move to be profitable. An above-average FX spread also suggests a lack of liquidity in the forex pair, which means traders could be at greater risk of slippage or volatility.
What is the bid-ask spread in forex?
The bid-ask spread is the gap between the prices offered for immediate buy (bid) and sell (ask) prices on a forex pair. You would take the bid or ask price of a forex pair when submitting a market order rather than a limit order at a predetermined price.
Why do brokers have wider spreads on forex minors and exotics?
Minor and exotic forex pairs are assigned with wider spreads than major forex pairs because of their reduced liquidity and higher trading costs. The lower liquidity means there’s a greater chance for volatility, so brokers mitigate these volatility risks by offering bigger margins between the bid and ask price.