What Is Spread?

What Is Spread in Forex?

The spread in forex is the difference between the price at which you can sell a currency pair and the price at which you can buy it at the same moment. Those two prices are called the bid and the ask. Understanding this gap helps explain why a newly opened trade can show a small loss even when the market has barely moved.

Spread is a trading cost, but it is not necessarily a separate fee deducted from your balance. Instead, it is built into the difference between the buying and selling prices. Every quote and calculation below is a hypothetical teaching example, not live market data or a recommendation to trade.

Bid and Ask: The Two Sides of a Quote

A forex quote normally contains two prices:

• Bid: the price at which you can sell the base currency, which is the first currency in the pair.
• Ask: the price at which you can buy the base currency. It is also sometimes called the offer.

Imagine EUR/USD has a bid of 1.08500 and an ask of 1.08512. Buying EUR/USD means buying euros against US dollars, so a market buy would normally execute at the available ask. Selling EUR/USD would normally execute at the available bid. Actual execution can differ if prices move or available liquidity changes.

The calculation is straightforward: spread = ask − bid. In this example, 1.08512 minus 1.08500 equals 0.00012. That price difference becomes easier to interpret when expressed in pips.

How to Calculate Spread in Pips

For most currency pairs, one pip is 0.0001. For pairs quoted in Japanese yen, one pip is typically 0.01. Many platforms display an extra decimal place, allowing prices to move in fractions of a pip.

For the hypothetical EUR/USD quote above, divide the price difference of 0.00012 by the pip size of 0.0001. The result is a 1.2-pip spread. The fifth decimal place represents one-tenth of a pip, often called a pipette or point on some platforms. Platform terminology can vary, so check the symbol specifications before interpreting a spread display.

As a separate hypothetical example, suppose USD/JPY has a bid of 150.200 and an ask of 150.215. The difference is 0.015. Dividing by the usual yen-pair pip size of 0.01 gives a spread of 1.5 pips.

Why a New Trade Can Start Below Break-Even

Return to the EUR/USD example. Suppose you buy at 1.08512. If you immediately close the position while the quote is unchanged, you sell at the bid of 1.08500. That difference creates a loss equal to the spread, before any separate commission or other charges.

For that long position to reach price break-even, the bid must reach your entry price of 1.08512, assuming no other costs. It is not enough for the ask alone to reach or remain at that level, because closing a long position requires selling at the bid.

The reverse applies to a short position. You open by selling at the bid and close by buying at the ask. This distinction is especially useful when the chart displays only bid prices: the visible chart price may not be the price needed to close a short trade.

Turning a Spread into a Money Amount

A pip measurement tells you the width of the spread, but the monetary cost also depends on position size. For a hypothetical 10,000-unit EUR/USD position in a US-dollar account, one pip is worth approximately $1. A 1.2-pip spread therefore represents approximately $1.20 of spread-related cost if opened and immediately closed at an unchanged quote.

This example excludes commission, slippage, and overnight financing. It illustrates a cost, not an expected trading result. Other currency pairs or account currencies may require currency conversion to calculate pip value.

Do not automatically double this estimate because a trade has both an entry and an exit. Buying at the ask and selling at the bid at an unchanged quote already produces the full spread difference. When quotes change during a trade, the eventual result reflects the actual entry and exit prices.

Why Forex Spreads Change

Many forex accounts use variable spreads. These can widen or narrow as liquidity, volatility, and a broker's pricing conditions change. Around major economic announcements or the daily rollover period, spreads may be wider than during more liquid trading periods. This is a general possibility, not a prediction for any specific session.

Some accounts advertise fixed spreads, but the applicable conditions and exceptions still matter. Also, a smaller advertised spread does not automatically mean a lower total cost: an account may charge a separate commission.

A Simple Spread Check Before Trading

• Identify both the bid and ask rather than relying on a single chart price.
• Confirm the pair's pip size and whether the platform displays pips or smaller points.
• Translate the spread into money using your intended position size.
• Check for separate commissions and other applicable charges.
• Consider whether a wider spread would materially affect your planned entry and exit.

The key takeaway: spread is the gap between the available buying and selling prices. Knowing which side of the quote applies to your order makes trading costs clearer, but it does not remove market risk or make a trade profitable.