Forex Spread Guide.
In this article we are going to explain everything you need to know about the spread in forex trading.
In this post you will find the following information.
What is the spread and why it exists What are pips and how to calculate them Information about the different types of spreads Useful information when choosing a broker.
What is spread in forex?
The spread in forex trading is the difference between bid-ask prices (i.e., sell and buy), expressed in pips.
The spread is a natural market condition as there are counterparties who want to buy or sell at different prices. The difference between bid-ask bids defines the amount of spread applied to the trade.
What is a pip in forex trading?
Pip stands for “Percentage in point,” and is the trading industry standard for calculating the minimum change on a currency pair’s spread. One pip corresponds to the fourth decimal digit of a forex pair, meaning that 1 pip corresponds to a 0.0001 change on the forex pair of interest.
The only exception is for JPY forex pairs, which instead calculate the minimum change on the second decimal digit.
Below is an example of a 1-pip spread on two different forex pairs:
Forex pairs Bid price (sell) Ask price (buy) EUR/USD 1.05340 1.05350 USD/JPY 134.820 134.830.
Why is there a spread in forex?
The spread in forex is part of the market itself, since the markets’ counterparts seek to buy and sell currencies at different price levels.
The spread thus depends on the number of counterparties in the market. The greater the number of counterparties, the tighter the distance between bid-ask values.
In addition, forex brokers may apply an additional mark-up on the spread in the form of a commission.
Why do forex brokers have different spreads?
Each forex broker is its own company with its own internal policies. For this reason, each broker decides on forex fees based either on its own needs, the technology offered to its traders, or by looking at competitors.
Forex brokers such as Pepperstone that use efficient technology are able to lower trading costs both direct (such as spread) and indirect (such as requotes) for all their traders.
Visit Pepperstone ( 74-89% of retail investor accounts lose money when trading CFDs )
How do trading hours impact forex spreads?
Generally, the best times to trade forex are between 12:00 and 16:00 (GMT+0), as the London and New York market sessions overlap during this time, generating a liquid market which impacts positively on spreads making them lower.
In fact, the forex market does not take place simultaneously all over the world, but different areas have different trading hours.
Forex Market Sessions Opening hour (GMT+0) Closing hour (GMT+0) Sydney 21:00 06:00 Tokyo 00:00 09:00 London 07:00 16:00 New York 12:00 21:00.
There are other overlaps during the day (Sydney-Tokyo from 00:00 to 06:00, and Tokyo-London from 07:00 to 09:00 but they do not impact as much as the London-NY one.
How does spread work in forex.
The forex spread is applied when an order is opened, not when it is closed.
For instance, when trading the EUR/USD forex pair, a 1 pip change corresponds to a commission of up to $10 if you open a position worth 1 standard lot (i.e. 100’000 currency units).
Floating vs Fixed vs Raw forex spreads.
Forex brokers generally offer 3 different types of spreads depending on their policy and account types: variable spreads, fixed spreads, and raw spreads.
Variable spreads (or floating spreads) are spreads that fluctuate around a value set by the broker (generally 0.8 to 1 pip for the most traded forex pairs). Variable spreads often include a mark-up, which is the main reason why this type of spread is statistically higher than raw spread trading. One of the brokers with the lowest variable spread is IG Markets, which offer spreads (with a mark-up) from 0.8 pips.
Visit IG Markets ( 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether can afford to take the high risk of losing your money. )
Fixed spreads remain stable at a value chosen by the broker. The more the forex pair is traded, the lower the chosen fixed spread will be. Fixed spreads are generally higher than variable spreads because the broker takes into account potential market fluctuations, and consequently will not have to adjust the spread at times of extreme volatility. The industry average for fixed spreads is around 1 pip, however brokers like AvaTrade manage to offer fixed spreads from 0.9 pips, and from 0.6 for professional traders.
Visit AvaTrade ( 79% of retail CFD accounts lose money )
Raw spreads are the natural market spreads that the broker offers without mark-up to its traders. For this reason, raw accounts offered by brokers are often referred to as “zero spread accounts” because they offer spreads very close to zero pips. When spreads are offered without mark-ups, brokers generally charge fixed commissions per each lot traded to earn a revenue on trades. On Pepperstone spreads are without mark-up and average 0.09 pips on the EUR/USD forex pair with a $6 commission per each lot traded.
Visit Pepperstone ( 74-89% of retail investor accounts lose money when trading CFDs )
What is a good spread?
Generally a spread is considered optimal when it is less than 1 pip, as the forex industry average is around that value.
One factor to consider when choosing a spread is per-lot fees, which are very common in “zero spread” accounts. These types of accounts offer very low spreads, but charge additional fixed fees per lot. These fees typically range between $5 and $8 per lot traded, which doing a cost conversion is the same as offering spreads of 0.5 or 0.8 pips.
Is it possible to avoid or reduce forex spreads?
Forex spreads cannot be avoided, as they are part of the market itself. However, expert clients can open professional forex accounts (depending on the broker) that often offer cost reduction and spread reduction programs.
The causes of a high spread can be different, but for more information you can check out the article where we discuss it in depth.
Why spread is important when trading forex.
The spread is important because it impacts the success of a trade. The spread carries a cost that makes the trader losing money as soon as the trade is opened. The larger the commission, the harder it is for the trader to break-even and potentially profit from it.
Less trader-friendly brokers charge spreads as much as three times higher than other brokers. This means that the trader will pay at least 3 times as much for the same product compared to other brokers.
Day traders and especially multi-day traders generally do not always need ultra-low spreads, as the impact of a few tenths of a pip per order does not impact on the final result. However, scalpers and traders who need to open and close positions continuously have a very thin margin of success that forces them to prefer forex brokers with low spreads.
About The Author.
Filippo Ucchino.
Co-Founder - CEO - Broker Expert.
Filippo is the co-founder and CEO of InvestinGoal.com. He has 15 years of experience in the financial sector and forex in particular. He started his career as a forex trader in 2005 and then became interested in the whole fintech and crypto sector.
Over this time, he has developed an almost scientific approach to the analysis of brokers, their services, and offerings. In addition, he is an expert in Compliance and Security Policies for consumers protection in this sector.
With InvestinGoal, Filippo’s goal is to bring as much clarity as possible to help users navigate the world of online trading, forex, and cryptocurrencies.