What is the spread in Forex?
The spread in Forex is the basic and direct cost incurred by every trader as soon as a trade is opened.
Whether you rely on fast-paced strategies like scalping or day trading, understanding how the difference between the two prices works is what separates a profitable strategy from one where costs eat into your profits.
The Concept of the Spread in Forex
The spread is the numerical difference between the buy price and the sell price of a specific currency pair at the moment the trade is executed:
- Ask Price: The price at which you buy the currency from the broker.
- Bid Price: The price at which you sell the currency to the broker.
Basic Rule: Any trade you open starts with a negative result equal to the value of the spread; therefore, the price needs to move in your direction by just this amount to reach the break-even point.
Practical Example of Calculating the Spread
If the EUR/USD pair is trading at the following prices:
Ask Price: 1.1000
Bid Price: 1.1002
Calculating the spread: 1.1002 - 1.1000 = 0.0002 (equivalent to 2 pips).
Types of Spreads in the Forex Market
Brokerage firms offer two main types of spreads depending on the account type and nature of trading:
1- Fixed Spread
Remains constant regardless of market fluctuations.
Advantage: Provides complete transparency regarding trading costs upfront.
Disadvantage: May be relatively higher than variable spreads during quiet market periods.
2- Variable/Floating Spread
It changes constantly depending on liquidity and price movement conditions.
Advantage: It drops to record lows (possibly as low as 0.0) during active trading sessions.
Disadvantage: It widens suddenly when major economic news is released or near the close of the trading day.
Factors Affecting Spread Width
Several factors control whether the spread in the market widens or narrows:
- Liquidity: Spreads on major currency pairs (EUR/USD, GBP/USD, USD/JPY) are narrower due to high liquidity compared to cross pairs or less liquid pairs.
- Economic Events: Spreads widen significantly in conjunction with interest rate decisions, inflation reports, and Nonfarm Payrolls (NFP) data.
- Trading Session Overlaps: Spreads narrow during the overlap between the London and New York sessions due to peak liquidity.
How Does the Spread Affect Profits from Scalping and Day Trading?
The spread is the biggest obstacle for scalpers, given that their target profit margins typically range from 5 to 10 pips.
The spread takes a significant portion of the target pips.
However, for those targeting 100 pips, the spread is not an obstacle.
4 Technical Steps to Reduce Spread Costs
1- Focus on the most liquid currency pairs: Trading major currency pairs ensures the lowest possible spreads.
2- Avoid opening trades right when news breaks: Stay away from trading immediately after high-impact reports are released to avoid slippage and widening spreads.
3- Choose peak trading hours: Execute your trades during the overlap between global trading sessions.
4- Compare brokers’ total costs: Choose a licensed brokerage firm that offers fast order execution with competitive spreads.
Finally, we provide you with a list of the most reliable brokers through the Olex Forex website at the following link: Here
