What does spread mean in Forex?
Spread in Forex, also referred to as the bid-ask spread, means the difference between the bid price and the ask price of a currency pair.
Changes in spread are measured in pips, which represent the smallest standard price movement in most currency pairs. In most major pairs, one pip equals 0.0001.
The spread is one of the main determinants of total trading cost in Forex. When you open a trade, you start with a small unrealized loss equal to the spread. The market must move in your favour by at least the size of the spread before you break even. Whether your broker offers fixed spreads or variable spreads also directly affects how consistent or fluctuating your trading cost will be.
What are fixed spreads?
Fixed spreads are the difference between the bid and ask prices that remain constant.
A fixed spread does not depend on current market conditions and keeps the same width under normal trading circumstances. Fixed spreads allow traders to know their spread cost beforehand, which makes trading costs more predictable and easier to plan. Brokers offer fixed spreads as a specific account type, and they are popular among traders who prefer stable pricing and smaller capital requirements.
What are variable spreads?
Variable spreads are the difference between the bid and ask prices that fluctuate based on market conditions.
A variable spread means the gap between the buy price and sell price changes constantly in line with market activity and liquidity. Variable spreads are the opposite of fixed spreads because they expand or contract as trading volume and volatility shift. This structure reflects current market pricing more closely and reduces the likelihood of requotes, but it also means trading costs can become wider during periods of high volatility or low liquidity.
How do I calculate spread in Forex?
You calculate spread in Forex by subtracting the bid price from the ask price of a currency pair.
The formula for calculating spread is:
Spread = Ask price − Bid price
For example, if GBP/USD is quoted at 1.2500 / 1.2503, the spread is 0.0003, which equals 3 pips.
Spreads are described as either tight (low) or wide (high). A tight spread means the difference between the bid and ask price is small, which lowers your trading cost. A wide spread means the difference is larger, which increases the cost of entering the trade.
How are spreads quoted in Forex?
Spreads in Forex are quoted as the numerical difference between the bid price and the ask price of a currency pair, and they are usually expressed in pips.
Forex prices are displayed in two parts. The first price is the bid, and the second price is the ask. The spread equals the ask price minus the bid price.
The table below shows 10 examples of how spreads are quoted:
For most currency pairs quoted to four decimal places, one pip equals 0.0001. For JPY pairs quoted to two decimal places, one pip equals 0.01. Traders see the spread directly as the gap between the buy price and sell price on their trading platform.
What causes spreads to change in Forex?
Spreads change in Forex when the difference between the bid price and the ask price moves in response to market conditions. There are 7 main causes of spread changes:
Liquidity
Trading session overlaps
Market volatility
Global events
Interest rate differentials
Broker type and pricing model
Technical disruptions
1. Liquidity
Low liquidity is the main reason spreads widen. When fewer participants are trading a currency pair, there are fewer buy and sell orders available. Brokers increase the gap between bid and ask prices to manage this reduced market depth.
2. Trading session overlaps
Spreads behave predictably based on which major sessions (London, New York, Tokyo) are open or overlapping. The London/New York overlap typically produces the tightest spreads, while the late New York to early Tokyo window sees them widen consistently.
3. Market volatility
High volatility causes spreads to fluctuate. When prices move quickly, the bid and ask prices adjust rapidly, and brokers widen spreads to account for higher risk. Spreads often widen during major economic news releases.
4. Global events
Natural disasters, political tensions, economic crises, or central bank announcements can increase uncertainty. Traders rush to adjust their positions, and spreads may widen as a result.
5. Interest rate differentials
Significant shifts in rate expectations between two currencies can affect how dealers price and hedge positions, which can influence spreads over a longer horizon.
6. Broker type and pricing model
ECN brokers typically offer variable spreads that reflect raw market conditions, while market makers may artificially widen spreads to manage their own book risk. This means some spread changes reflect broker behavior rather than underlying market conditions.
7. Technical disruptions
Technical problems at exchanges, liquidity providers, or broker systems can temporarily disrupt pricing feeds. This disruption reduces available liquidity and can cause spreads to widen.
What is the smallest possible spread change in Forex?
The smallest possible spread change in Forex is one pipette, which equals one-tenth of a pip.
Most major currency pairs are quoted to five decimal places, such as 1.10005. In this case, one pip equals 0.0001, and one pipette equals 0.00001. When spreads are quoted in fractional pips, the smallest change you can see is 0.1 pip.
For JPY pairs quoted to three decimal places, one pip equals 0.01, and one pipette equals 0.001.
If a broker quotes EUR/USD with a spread of 0.8 pips and it changes to 0.9 pips, that 0.1 pip movement represents the smallest visible spread adjustment. This fractional pricing allows brokers to offer tighter spreads and more precise quotes.
