Forex Academy
Chapter 2: Currency Basics

Spread and How It Affects Your Trades

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Understanding Spreads in Forex Trading

The spread is the difference between the bid price (the price at which buyers are willing to purchase a currency) and the ask price (the price at which sellers are willing to sell). It represents the cost of trading and is effectively the fee paid to the broker for executing a trade.

Bid Price vs. Ask Price

  • Bid Price: The price at which the market is willing to buy the base currency.

  • Ask Price: The price at which the market is willing to sell the base currency.

The spread is the difference between these two prices.

Example of a Spread:

If EUR/USD is quoted as:

  • Bid Price: 1.2000

  • Ask Price: 1.2002

The spread is 2 pips (1.2002 - 1.2000 = 0.0002).

This means the trade must move at least 2 pips in your favor before you break even. Any further movement beyond the spread determines your profit or loss.

Types of Spreads

Tighter Spreads

  • Found in major currency pairs like EUR/USD, USD/JPY, and GBP/USD.

  • Can be as low as 0-2 pips, especially in high liquidity markets.

Wider Spreads

  • Found in exotic currency pairs (such as USD/TRY or EUR/ZAR) and low liquidity markets.

  • Can be 10 pips or more depending on market conditions.

How Spreads Affect Your Trading

Cost of Trading

The spread is an upfront cost, meaning you start a trade slightly in the negative.

  • For short term traders (such as scalpers) small spreads can significantly impact profitability since they rely on frequent, small price movements.

Market Liquidity and Spreads

  • Tighter spreads indicate a highly liquid market, where many buyers and sellers are actively trading.

  • Wider spreads suggest lower liquidity, which can occur in exotic pairs, after market hours or during major economic events.

Key Takeaways

  • The spread is the cost of executing a trade, calculated as the difference between the bid and ask price.

  • Major pairs tend to have low spreads, while exotic pairs often have wider spreads due to lower liquidity.

  • Traders must factor in spread costs when determining trade profitability, especially in short-term trading strategies.

  • High liquidity = tighter spreads, while low liquidity = wider spreads.