Forex Spreads

Spread in Forex is the difference between the bid price and the ask price: the bid/ask spread of a currency pair. The Spread cost is measured in 'pips' or ‘points’ and represents the primary cost of trading. Popular currency pairs—think major currency pairs, such as the EUR/USD and AUD/USD—have lower spreads as a result of higher levels of liquidity. An in-depth explanation can be found in our Beginner's Guide to Forex Trading.

The bid price is the ‘quote price’ a trader or investor can sell at (located on the left side of the quotation), and the ask price is the quote price a trader/investor can buy at (located on the right side of the quotation). We can also think about it from a liquidity provider’s point of view: the bid price is willing buyers standing ready to receive sell orders (from traders), and the ask price represents willing sellers that are prepared to sell to buyers (buy orders from traders). This concept is fundamental to understand.

If the bid/ask rate for the EUR/USD currency pair is $1.1251/$1.1252, this means you can effectively buy 1 unit of EUR at a higher ask price of $1.1252 and sell it lower at the bid of $1.1251. The euro (EUR) is the base currency, and the US dollar (USD) is the quote currency (or term currency).

In the above example, the spread in pips—the difference between the bid and ask prices—is 0.0001 = ($1.1252 - $1.1251). The pip value, in this example, is priced to the 4th decimal place and represents 1 pip (if priced to the 5th decimal, you would see the following: 0.00010 = [$1.12520 - $1.12510]). Remember that a pip is an abbreviation for ‘percentage in point’, equivalent to 1/100 of 1% and is the smallest WHOLE unit a currency pair can move.

The current bid and ask prices are the price levels that traders can engage (trade) with the market immediately or ‘on the spot’. The ask price will always usually be slightly higher than the underlying market price, whereas the bid price is slightly below the underlying market price.

The size of the spread plays a pivotal part in Forex trading. This is particularly the case for those using trading strategies that conduct a large number of transactions in a single trading session. Trading volume, liquidity, market volatility, news, and time can all impact spreads. The spread can affect profit as spreads can widen considerably when the financial markets are volatile and cause slippage (filled at a price different from the requested fill price).

It is important to understand the difference between fixed and variable spreads. Fixed spreads remain the same, no matter the market conditions. Variable spreads keep changing based on the supply and demand of the instruments and the overall market volatility. Choosing the optimal spread type is important to keeping trading costs to a minimum. Retail traders who trade less frequently could benefit from fixed spreads, while those who trade frequently during peak market hours (when the spreads are the tightest) might prefer variable spreads. Variable spreads are normally lower than fixed spreads, especially in calmer markets.

Trading with an FP Markets FX RAW account opens the door to some of the lowest spreads in the market. Our liquidity is sourced from some of the largest liquidity providers, with no markup applied. This gives us the ability to offer you the tightest spreads, starting as low as 0.0 pips during the most liquid times, something that was previously the domain of hedge funds only.

The spread of a given currency pair reveals information about market conditions such as time, volatility and liquidity. Emerging currency pairs have a greater spread than major currency pairs due to lower levels of liquidity. Interestingly, it is worth pointing out that only 8 major currencies account for approximately 85% of the Forex market turnover.