The Forex Spread: Your Entry Fee

Bid and Ask: Two Prices for Every Pair

At any given moment, every currency pair has two prices:

• Bid price: The price at which you can SELL the base currency. This is always the lower price.
• Ask price: The price at which you can BUY the base currency. This is always the higher price.

The spread is the difference between these two prices: 1.08520 - 1.08500 = 0.00020 = 2.0 pips.

Why the Spread Is Your Cost

When you click "Buy," you enter at the ask price (the higher one). When you click "Sell" to close the trade, you exit at the bid price (the lower one). The difference between them is the spread, and it represents your immediate cost of entry.

Here's what happens when you open a buy trade on EUR/USD with a 2-pip spread:

1. You buy at 1.08520 (the ask price)
2. The instant you're in the trade, the "sell" price is 1.08500 (the bid price)
3. Your unrealized P/L is immediately -2 pips (or -$0.20 on a micro lot)
4. Price needs to rise at least 2 pips just for you to break even

This is why the spread matters. It's not a separate fee on your statement. It's baked into every trade as the gap between the price you enter and the price you could exit at that instant.

Fixed vs Variable Spreads

Fixed spreads stay the same regardless of market conditions. Some market-maker brokers offer this. The advantage is predictability. The downside: fixed spreads are usually wider than the best variable spreads.

Variable spreads change based on market conditions. During peak liquidity (London-New York overlap), spreads tighten. During low liquidity (Sunday night, holidays) or major news events, spreads widen, sometimes dramatically.

Most ECN/STP brokers (ECN stands for Electronic Communication Network, STP for Straight-Through Processing: broker models that route your orders to outside liquidity providers, fully explained in lesson 1-8) offer variable spreads, sometimes with an additional fixed commission per lot. The total cost (spread + commission) is often lower than fixed-spread brokers for major pairs.

Typical Spreads by Pair Type

When Spreads Widen

Variable spreads can spike in these conditions:

• Major news releases such as Non-Farm Payrolls (NFP), the Consumer Price Index (CPI), and central bank rate decisions: spreads can jump to 5-10x normal for a few seconds
• Market open (Sunday 5pm EST): gaps and thin liquidity cause wide spreads
• Low-liquidity hours (between session closes and opens)
• Flash crashes or unexpected events: spreads can blow out to 50+ pips on normally tight pairs

Spread as a Percentage of Your Trade

On a micro lot trade expecting 30 pips profit:

• 2-pip spread = 6.7% of your expected profit goes to costs
• 10-pip spread = 33% of your expected profit goes to costs

This is why scalpers (traders going for 5-10 pips per trade) are obsessed with tight spreads. If your target is 10 pips and the spread is 3 pips, you need 13 pips of favorable movement just to hit your target. The tighter the spread, the smaller the "hurdle" you need to clear.