Forex Spread: Definition, Calculation & Spread Strategy

What Is Forex Spread?

Forex spreads are the fees the broker charges traders when entering the market, measured by pips. It’s the difference in cost between the ask and bid in the Forex market. As small as the spread is, as cheap as the trading cost will be, it will benefit your trading profits.

Why Is The Forex Spread Important?

If you trade Forex, you need to understand the Forex spread because it is a cost that you will pay when you enter and exit a trade.

• Reducing the trading cost and increasing profits: It’s better to choose a lower spread to lower your trading fees. This will help you gain more net profit.

• Trading Consistency: If you are a day trader who likes to enter multiple positions, then your spread might be increased. Make sure you choose a broker with a lower spread to save on costs.

What Is The Type of Spread in Forex?

Now, you might understand the importance of spread already, but what does it mean in different types of the forex market? This part shouldn’t be missed, as it will help you choose the right type for your trading style.

Fixed Spreads

Fixed spreads are spreads for which the broker has fixed the fees. No matter whether the market is fluctuating, volatile, or quiet today, the spread will always be fixed. This helper makes it easier to calculate net profit, which is great for beginner traders.

Floating Spreads

Floating spread, or another name for it, is a variable spread. This type of spread changes constantly, following market liquidity and volatility. If the market has increased the liquidity and volatility, the spread will be bigger. If the market has lower volatility but high liquidity, the spread will be small.

Zero Spreads

Some brokers offer account types that don't charge fees or 0 pip spreads in the Forex market to reduce trading costs. But please be aware that some other commissions charge instead, so that the trader can enter and exit the trade fast and accurately. With 0% spreads, it can sometimes pop up when the market is more volatile.

Why Influence The Forex Spread?

To be aware before entering and exiting a trade, you need to know what influences the forex spread to plan your trade better for high potential net profit and to align your trading strategy even more.

Liquidity in The Forex Market

The liquidity influenced the direction of the Forex spread, both high liquidity and low liquidity, in different ways:

• If the market is highly liquid, the spread will be narrower.

• If the market has lower liquidity, the spread will be wider.

The more competition in the market, the lower the spread fees will be; when the market is quiet, the cost of the spread will increase.

Forex Spread Is Influenced by The Trading Sessions.

You may have heard that the forex market opens 24 hours a day, and that’s correct. But it doesn’t mean the market will be active throughout the day, which is why it matters when calculating spreads.

• The opening time in the London and New York sessions often sees high trading volume, which narrows spreads.

• The Asian session tends to have lower trading volume, and there’s still little buying or selling, so the spread will be wider.

Market Volatility

Market volatility is the extent to which prices move, usually in response to news and events. Market volatility differs from liquidity, even though both are related to spreads. Here’s how it influenced the spread:

• When the market is volatile, it is harder to predict, and the spread will be wider.

• When the market is less volatile, it means it is easier to predict the market, and the spread will be narrower.

How to Calculate Spread in the Forex Market?

How can I know how many spreads the broker charges? In this part, we will guide you on exactly how to calculate it and what it means in the forex market.

Forex Spread Formula:

Spread = Ask Price - Bid Price.

What It Means:

• Ask Price: The price that the Forex dealer wants to sell at.

• Bid Price: The price at which the Forex dealer is willing to buy.

Example of Spread in Forex:

If you are choosing to trade GBP/USD with the following price:

• Bid Price: 1.3089

• Ask Price: 1.3091

Forex Spread = 1.3089 - 1.3091 = -0.0002 (= 2 pips )

The 2 pips in this major currency pair are affordable.

Example of Best Spread in Forex Market:

To show you more examples of spreads, XS has offered variable spreads following different account types. The major currency pairs usually have a spread of 1-3 pips. XS offers a great option for you if you trade EUR/USD with them.

Here are the pips following different account types:

How Does Forex Spread Work Differently in Forex Pairs?

Spreads in the Forex market work differently because they are charged differently for each currency pair.

The forex market has 3 categories of currency pairs: major, minor, and exotic. Let’s see examples of how many spreads are in each pair to help you make a better decision on choosing brokers.

Here’s the typical spread range in each currency pair:

How to Use Spreads to Gain Profit?

When you know the spread for each currency pair, you will know how to adapt it to your spread forex strategy to gain more profit. We gathered some tips you shouldn’t ignore if you want to increase profit.

Choose Accounts That Have a Lower Spread.

Once you understand spreads, you can choose the account types that suit your trading style. If you want a lower spread, choose an account type with a lower spread. Now that you know how to calculate spread, you'll understand how it works in Forex trading.

Trade During The Market Open Sessions.

Trading during the market open will help you reduce trading costs because there are more buyers and sellers in the market at this time. You can also choose to enter sessions such as Asian, London, and New York. So, the benefit of entering or exiting this market is that you will get narrower spreads.

Trade Small to Lower Your Pips.

If you want to take small pips to save trading costs, you can take shorter or smaller trades. Also, if you take smaller trades, you will earn small profits. Anyhow, you can take multiple small trades to increase your profit a bit more.

Don't Trade During The New Release.

When the market is hard to predict, it increases the risk to your trades. It’s better to avoid this trading time or take a short trade, such as scalping, when the price jumps. Also, during new releases or economic events, the spread will be wider.

Conclusion

Forex spread is the trading fee the broker charges traders when they enter and exit the market.

Understanding spread in the forex market will help you know how many pips you need to calculate to see the net profits and which types of trading accounts you should apply for.

When you understand pips, you can apply that knowledge to better align with your trading strategy.