Forex Broker Spreads Explained
A forex broker spread is the difference between a currency pair’s bid and ask prices. It is a trading cost built into the quote rather than necessarily charged as a separate fee. The SEC’s forex investor bulletin explains that a wider spread increases the cost of buying and selling a currency, apart from commissions and other charges.
The useful comparison is not simply which account advertises the smallest number. You need to know what that spread costs at your position size, how it behaves during your trading hours, and whether commission sits alongside it. Spreads are one part of forex broker fees and trading costs, not the whole bill.
How to Read a Forex Spread
A currency quote contains two prices: the bid is the price at which you can sell, and the ask is the price at which you can buy. These are the definitions used in cTrader’s trading glossary. Subtract the bid from the ask to find the quoted spread.
Spread = ask price − bid price
Consider a hypothetical EUR/USD quote with a bid of 1.08500 and an ask of 1.08512. The difference is 0.00012. For EUR/USD, one pip is 0.0001, so this spread is 1.2 pips. TradingView’s instrument documentation distinguishes pip size from the smaller minimum price increment, which helps explain why a quote can display five decimal places without changing the size of a pip.
On a display where one point means 0.00001, that same gap is 12 points, not 12 pips. Check the platform’s units before comparing figures. The guide to pips and pip values covers the conventions in more detail.
If you buy at 1.08512 and immediately sell at an unchanged bid of 1.08500, the price difference is a 1.2 pip loss. For that purchase to break even before other charges, the bid must reach your entry price of 1.08512. Returning to the chart level you noticed before clicking buy is not necessarily enough.
How to Calculate the Spread Cost
You can turn a spread into a cash amount using either the price gap or its pip equivalent:
Spread cost in quote currency = price gap × units of base currency
Spread cost in account currency = spread in pips × pip value in account currency
Using the hypothetical EUR/USD quote above, a position of 100,000 euros has a spread cost of 0.00012 × 100,000, or $12. A position of 10,000 euros has a $1.20 spread cost. At 1,000 euros, the cost is $0.12.
These calculations assume execution at the displayed prices, no price movement between the transactions, and no commission. They produce dollars because USD is the quote currency in EUR/USD. If your account uses another currency, convert the result into that currency before comparing cash costs.
Do You Pay the Spread Twice?
Not as two full spreads in the unchanged quote example. Buying at the ask and selling at the bid creates one full spread of loss across the completed trade. Adding another $12 would count the same cost twice.
Another way to measure the cost is against the midpoint between bid and ask. Each transaction crosses half the spread relative to that midpoint. If the spread changes while the position is open, the completed trade’s spread cost relative to midpoint prices reflects half the entry spread plus half the exit spread.
Once you calculate profit or loss from actual entry and exit execution prices, the spread is already reflected in those prices. Do not subtract it again. Account for any separate charges that the calculation has not yet included.
Fixed, Variable and Raw Spreads
These labels describe different aspects of pricing. Fixed and variable describe whether the gap changes. Raw describes how the quoted gap relates to the prices available to the broker.
Fixed and Variable Spreads
A fixed spread holds the quoted gap at a stated level under the account’s terms. A variable, or floating, spread changes as quotes update. MetaTrader’s symbol specification documentation shows where the spread, its floating status, contract size and commission settings can be checked.
For fixed pricing, inspect the conditions rather than assuming every trading hour has identical terms. Does the stated spread apply around announcements? Are there different schedules for different sessions? What happens when an order cannot be filled at the requested price?
For variable pricing, assess the range of spreads you would encounter, not just the lowest reading. Neither label answers the separate question of execution quality.
Raw Spreads and Spread Markups
A raw spread account generally presents prices intended to reflect liquidity provider quotes with little or no added spread markup, often alongside a commission. However, the label alone does not establish how orders are handled. DayTrading.com’s analysis of broker pricing labels explains why raw pricing and order routing should not be treated as the same thing.
A spread based account may instead build the broker’s charge into a wider quote. The SEC warns that commission free forex trading can still carry a spread markup, and that some pricing arrangements include both commission and markup. Neither “raw” nor “commission free” settles which account costs less.
Compare Spreads and Commissions Together
Put both pricing structures into the same currency and use the same trade size. The following example assumes a 100,000 euro EUR/USD position, a USD account, and unchanged spreads between entry and exit. The figures are hypothetical, not market averages or offers.
| Cost component | Spread only pricing | Tighter spread plus commission |
|---|---|---|
| Quoted spread | 1.2 pips | 0.2 pips |
| Spread cost | $12 | $2 |
| Commission per side | $0 | $3.50 |
| Total opening and closing commission | $0 | $7 |
| Combined spread and commission cost | $12 | $9 |
The commission account costs $3 less under these assumptions. Its combined cost is equivalent to 0.9 pips: $9 divided by the $10 pip value.
That result changes if the second account’s spread widens to 0.6 pips. Its combined cost becomes $13, making it more expensive than the first account at the assumed 1.2 pip spread. A pricing label is no substitute for arithmetic.
Check whether the quoted commission covers one side or the completed trade, and whether minimum charges or volume tiers apply. Those details belong in the forex commission calculation. The table excludes financing, currency conversion charges and slippage.
Why Forex Spreads Widen
Spreads reflect trading conditions as well as the broker’s pricing policy. When price uncertainty rises, dealers face greater risk between quoting a price and managing the resulting position. BIS research into foreign exchange volumes, volatility and spreads found a positive relationship between volatility and spreads in the emerging currency markets studied. That is a tendency, not a rule that every volatile minute must produce a wider quote.
Time of day also matters. The BIS Markets Committee’s analysis of the October 7, 2016 sterling flash event identified trading outside sterling’s core hours as a factor in the market’s vulnerability. A currency market being open does not mean trading conditions remain constant throughout the day.
For your own comparison, sample the same pair during the same forex trading sessions. Include announcement periods, the daily rollover window and holiday or reopening periods if your positions could remain open then. A midday screenshot cannot describe a whole trading week.
A wider spread alone does not establish misconduct. It also should not end an investigation into unusual pricing. For U.S. Forex Dealer Members, NFA’s electronic trading guidance says bids and offers should be reasonably related to current market prices and conditions. Preserve timestamps, quotes and execution records when asking about an unexpected cost.
Minimum Spreads Are Not Typical Trading Costs
“From 0.0 pips” identifies a minimum, not the spread you will receive on every trade. Even when the displayed gap is zero, a separate commission can remain. Zero is a quote, not a promise of free trading.
Use a consistent comparison process:
- Match the conditions: compare the same currency pair, account category, order size and trading hours.
- Check the measurement period: ask when an advertised average was recorded and whether any hours were excluded.
- Inspect unusually wide readings: assess their size and duration, not only the average.
- Add separate charges: calculate the completed trade’s commission before ranking accounts.
A simple average can conceal brief spikes. Your own trading pattern can also make a published average less useful: an average across the full day does not necessarily describe costs around the announcements you trade.
Record observations across several sessions rather than treating one favorable reading as representative. Keep the account conditions alongside the numbers so you can tell whether a later comparison is still like for like.
How Spreads Affect Stops and Execution
The price used to trigger an order matters. In MetaTrader’s documented forex order behavior, stop loss conditions for long positions are checked against the bid, while those for short positions are checked against the ask. Its order execution principles explain this distinction.
Suppose a short position has a stop at 1.08600. The bid could remain at 1.08580 while the ask widens to 1.08602. Under an ask based trigger rule, that stop condition has been reached. The relevant price crossed the level even though the bid did not.
This can be confusing on a bid based chart. MetaTrader’s chart settings documentation explains how to display the ask line. Check your own platform’s chart basis and the account’s trigger rules before interpreting an apparent mismatch.
Spread and slippage are different. Spread is the gap between simultaneous buying and selling quotes; slippage concerns a change between the expected or requested price and the price available for execution. NFA’s guidance on price slippage addresses price changes while orders travel to a dealer’s system. A narrow displayed spread does not by itself establish a low final execution cost.
Make Spread Costs Part of the Trading Plan
Small targets leave less room for trading costs. In a hypothetical trade with a constant 1.2 pip spread, a favorable five pip movement between entry and exit midpoints leaves 3.8 pips before commission. A 50 pip movement leaves 48.8 pips. The spread consumes 24% of the smaller movement but 2.4% of the larger one.
Test that sensitivity rather than relying on the best available quote. Platform simulations can use different spread assumptions: cTrader’s Market Replay documentation, for example, distinguishes manually specified spreads from spreads derived from historical tick data. Check which method your test uses and repeat the calculation with less favorable assumptions.
For positions held beyond the session, assess swap rates and overnight charges separately. For frequent trading, total the spread and commission across the expected number of completed trades.
Use those figures when choosing a forex broker, alongside execution terms and regulatory checks. The useful spread is the one available for your trade size, during your trading hours, with the rest of the charges included.