When you open a forex trade, you start at a loss. Not because the market moved against you — because of the spread. The spread is the gap between the price you can buy at and the price you can sell at, and it is the primary way most forex brokers make money. Understanding it is not optional — it is the foundation of understanding your trading costs.
Every currency pair is quoted with two prices: the bid and the ask.
The bid is the price the broker buys from you (the price you get when you sell). The ask is the price the broker sells to you (the price you pay when you buy). The difference between them is the spread.
When you enter a trade, you buy at the ask price. To break even, the market must move in your favour enough to reach the bid price of where you bought. Until that point, you are underwater by the size of the spread — even if the market does not move at all.
The spread is measured in pips. For most major currency pairs, one pip is the fourth decimal place (0.0001). For USD/JPY, one pip is the second decimal place (0.01).
There are two types of spread:
Variable (floating) spreads change with market conditions. During major currency pairs' peak trading hours (London-New York overlap, 13:00–17:00 UTC), spreads on EUR/USD can be as low as 0.1–0.3 pips at ECN/STP brokers. During off-hours (Asian session for European pairs) or around major news events, the same pair can widen to 3–10 pips. Variable spreads are standard at ECN-model brokers (Pepperstone, IC Markets, FP Markets).
Fixed spreads stay constant regardless of market conditions. Brokers that offer fixed spreads (common at market-maker brokers) typically set them higher than the average variable spread — you pay more during calm conditions in exchange for certainty during volatile ones. Fixed spreads are useful if you trade primarily during high-volatility periods.
For most beginners who trade during normal market hours, variable spreads at an ECN broker will be cheaper than fixed spreads.
| Broker | Model | EUR/USD avg spread | GBP/USD avg spread | USD/JPY avg spread | Commission |
|---|---|---|---|---|---|
| Pepperstone | ECN/STP | 0.0 pips (Razor) | 0.4 pips | 0.3 pips | $7/lot round-turn (Razor) |
| IC Markets | ECN | 0.0 pips (Raw) | 0.3 pips | 0.2 pips | $7/lot round-turn (Raw) |
| FP Markets | ECN/STP | 0.0 pips (Raw) | 0.4 pips | 0.3 pips | $6/lot round-turn |
| XM | Market maker | 0.6 pips | 0.8 pips | 0.7 pips | No commission (Ultra Low) |
| eToro | Market maker | 1.0 pips | 1.5 pips | 1.0 pips | No commission |
A "zero spread" account does not mean zero cost — ECN brokers charge a commission per lot instead of building profit into the spread. To compare true costs, add the spread cost and the commission. On a standard lot EUR/USD: Pepperstone Razor at 0.0 spread + $7 commission = $7 per round-turn. XM Ultra Low at 0.6 pips + $0 commission = $6 per round-turn. For very short trades (scalping), ECN + commission is usually cheaper. For longer holds where you enter and exit once a week, the difference is minor.
Spreads are not constant. They widen in three situations:
During major news events (non-farm payrolls, central bank rate decisions, CPI releases). Liquidity providers pull back during high-uncertainty moments, and brokers pass on wider spreads. A EUR/USD spread of 0.3 pips can become 5–10 pips for 1–2 minutes around a news announcement.
At market open/close (particularly the Sydney open on Sunday evening and just before market close on Friday). Lower liquidity = wider spreads.
For exotic currency pairs (USD/TRY, EUR/ZAR, etc.) at all times. Exotic pairs have far less liquidity than majors, and spreads of 10–50 pips are common even during normal trading hours.
Knowing this matters practically: if you trade around news events, your real cost per trade can be 5–20× your off-peak cost. Some traders specifically avoid trading for 5–10 minutes around scheduled high-impact announcements for this reason.