Forex Spreads Explained - What You Need to Know

What is a spread in the Forex market?

A Forex spread is the difference between the bid price and the ask price of a currency pair in the foreign exchange market.

The bid price is the price at which you can sell a currency pair. The ask price is the price at which you can buy a currency pair. The spread is the difference between these two prices.

For example, if the EUR/USD bid price is 1.1250 and the ask price is 1.1255, the spread would be 0.0005 or 5 pips. A pip (or percentage in point) is the smallest increment of price movement for a currency pair. For most major pairs, one pip is 0.0001.

Factors affecting the size of a spread

The following factors affect the size of a spread:

• Asset liquidity.

  The larger the trading volumes, the lower the trading costs;

• Volatility.

  When there is an increase in volatility due to an uptick in market conditions, a sharp imbalance between the bid and ask orders accrues, which causes spreads to widen;

• Broker's trade policy.

  Brokers have the right to change the amount of their markup (extra charge). For example, to weed out traders working on algorithmic scalping to reduce the load on its servers;

• Level of business activity.

  For example, at night, the activity of trading in European currencies decreases and, conversely, increases in Asia;

• Types of account.

  There are brokers with fixed spreads, and there are professional ECN accounts with the smallest spreads, but each lot will have its own fixed commission.

Types of a spread

Types of spread and its influence on your trading system

A spread is a commission that directly affects the performance of a trading system. This point is especially important during scalping. The spread can sometimes widen to 3-5 pips (percentage in points), while the very essence of scalping is high-frequency trading while taking profits based on the pips. Therefore, some brokers specifically set a high spread to control scalping.

What is a zero spread?

This is a marketing technique used by brokers to attract traders. The wording “spread from 0 pips” means that a broker is ready to provide the minimum difference between the bid and ask prices, but it is never zero, even if we are talking about the instant order execution. In theory, depending on the asset and the liquidity provider, the spread in currencies can be equal to 6 decimal places, and the broker may round it down to five-digit quotes. Only then does a trader really get a zero price difference but this rarely occurs in practice.

Where to find the spread rate in MT4?

Step-by-step guide on how to find the spread in MetaTrader 4:

• 1

  In the order.

  

  The spread here will be the zone between the quote lines or the difference between the bid and ask prices.

• 2

  To display the ask price on the chart, right-click on the chart, select the Properties item, go to the General tab and check the corresponding option.

  
• 3

  In the specification of the contract. In the Market Overview window, right-click on the asset, select the Specification item. The type of spread is indicated there. In the same menu, check the Spread box, and information on it is now displayed in the Market Overview window.

  

How to choose a currency pair depending on the size of a spread

Classifications of currency pairs depending on a spread:

• 

  The major currency pairs are the most liquid currency pairs with high trading volumes. They include EUR/USD, GBP/USD, JPY/USD, CAD/USD, NZD/USD, and CHF/USD, where the spread is the smallest;


• 

  Pairs with an average spread. Here the spread can be 1.5-2 pips, so it is better to select the points of transaction opening as accurately as possible, picking up the beginning of the trend;

• 

  Pairs with the maximum spread. This applies to "exotic" instruments. For example, pairs of developing countries (Pakistan rupee, South African rand, etc.). Due to the lack of trading volumes for them, the spread is the highest among these.

Methods of reducing a spread

Since the size of a spread does not depend on a trader, there are few options for reducing it but the following suggestions may help:

• 1

  Choose accounts with the smallest spread. To do this, use comparative tables of the independent resources (see below), compare trading costs using demo accounts, etc. Note that accounts with minimal spreads usually have a commission per lot and a high entry threshold.

• 2

  Select the most liquid assets with the highest trading volumes. For them, the difference between the bid and ask prices is minimal.

• 3

  Do not trade when important market news first breaks because that is when the spread is most likely to widen for accounts with the floating spreads.

• 4

  Use rebate services. Spread refunds (i.e., rebates) are a free service that allows you to partially offset trading costs. The advantages of a rebate service are:

  • a trader does not bear any costs for the rebate service. The service is free of charge without fees or commissions;

  • a trader reduces costs by partial compensation of the spread;

  • a trader receives legal and informational support of the rebate service.

The partial rebate of the spread is an analog of the classic cashback. A trader chooses a rebate service (there are only a few), goes through free registration, and opens an account with any broker from among the service partners using the partner’s link. There are no problems with choosing a broker because most rebate services are affiliated with several dozen brokers. For each completed transaction, regardless of the result, a broker pays the rebate service a commission (part of the broker’s profit), the rebate service, in turn, shares part of its fee with the trader.

How to choose a broker: Forex spread comparison

• 1

  Use third-party independent resources that constantly update and publish spread tables. For example, MyFxBook.

  

  This resource is convenient because it is one of the leaders among information resources for traders. Here you can find information on dozens of brokers in Europe under the heading Currency Pairs and other instruments. There is a filter. The data here are averaged and do not take into account the section of accounts of a separate broker, so the numbers should be double-checked. However, this table is enough to create a general overview.

• 2

  Оpen and compare the platforms of several brokerage companies, try to open transactions for one instrument at least on a demo account. You will immediately see the real spread. For example, below are two screenshots taken on a weekend (that is, when there was no trading):

  

  And the second screen:

  

  Contains not only the difference in quotes on a closed trading day but also the difference between the bid and ask prices, is immediately evident. The first broker has a difference in the 5th decimal place, the second — in the 4th. Which broker do you think is more profitable to work with?

• 3

  Use spread indicators. These are simple, convenient scripts installed in MT4 through the data catalog. They show the difference between the bid and ask prices as a bar chart. They can be used to track the current difference, as well as its change in comparison with the history of the quotes. It is visually convenient.

  
• 4

  When you see the spread value, specify what quotes are in question. The spread of 2 pips can turn into 20 pips in 5-digit quotes.

  Also, remember that the size of the spread depends on the type of account, asset liquidity, volatility, and broker’s liability. Try to build trading systems in such a way that the costs can be ignored. Don’t think about how to save money, but how to make money.

Good luck with trading!