Spread

A spread in FX is the gap between the bid price (what the broker will pay for a currency pair) and the ask price (what the broker will charge). The spread is measured in pips and represents the immediate cost of opening a trade. A major pair might spread 1 pip; an exotic pair might spread 10–20 pips or more.

How spreads work

When you see a quote for EUR/USD as 1.0850/1.0851, this means:

• Bid: 1.0850 (the price at which the dealer will buy euros from you)
• Ask: 1.0851 (the price at which the dealer will sell euros to you)
• Spread: 0.0001, or 1 pip

If you buy (going long), you pay the ask: 1.0851. If you sell (going short), you receive the bid: 1.0850. The moment you open the trade, you are down by the spread. You have lost 1 pip before the market even moves. To break even, the price must move 1 pip in your favor.

On a standard lot of EUR/USD, a 1-pip spread costs $10. On a mini lot, it costs $1. On a micro lot, it costs $0.10. So spreads are a smaller obstacle on smaller lot sizes.

Why spreads exist

Spreads are how brokers and dealers make money. They do not charge commissions (usually); instead, they profit from the difference between the bid and ask. The larger the spread, the more profit the dealer captures.

Spreads also reflect market conditions. In a tight, liquid market with many competing dealers, spreads are narrow because competition drives them down. In a wide, illiquid market with few price-makers, spreads are wide because there is less competition and dealers demand higher compensation for the risk of holding the currency.

Spreads on major vs. exotic pairs

Major pairs — EUR/USD, USD/JPY, GBP/USD — trade continuously with thousands of price-makers competing. Spreads are razor-tight: 0.5 pips in the wholesale interbank market, 1–2 pips for institutional clients, 2–4 pips for retail. A trader can jump in and out frequently with minimal friction.

Minor pairs — EUR/GBP, AUD/JPY, etc. — are less liquid. Spreads are 2–5 pips typically. Less frequent trading; fewer competing dealers.

Exotic pairs — USD/BRL, USD/ZAR, etc. — are thinly traded. Spreads are 10–50+ pips. Volume is sporadic; there may be long periods with no live quotes. This makes exotics suitable only for position trades (hold for days or weeks), not for intraday trading.

Fixed vs. variable spreads

Some brokers offer fixed spreads — the spread never changes. EUR/USD is always quoted at 1.0850/1.0853 (a 3-pip spread). Fixed spreads are predictable but usually wider than variable spreads in calm markets.

Other brokers offer variable spreads — the spread widens and narrows with market conditions. In calm markets, EUR/USD might spread 1 pip. During news releases, geopolitical crises, or market crashes, the same pair might spread 10, 50, or 100 pips. Variable spreads are tighter on average but can blow out unexpectedly, turning a 50-pip move into a 100-pip cost if you need to exit during a spike.

Most retail brokers offer variable spreads with a disclaimer that “spreads may widen during volatile conditions.”

The cost of a round trip

A round trip — buying and then selling, or selling and then buying — costs you the spread twice. If EUR/USD spreads 1 pip, a round trip costs 2 pips. On a mini lot, that is $2 round-trip cost. On a standard lot, it is $20.

For a day trader making 5 trades a day on 5 mini lots, the daily spread cost is 5 trades × 5 lots × $1 per pip × 2 pips = $50 per day. Over a month (20 trading days), that is $1,000 in spread costs alone. This is why day trading in FX is a difficult game — you must make enough profit to cover spreads, commissions (if any), and slippage, and still come out ahead.

See also