What is the spread in Forex trading?

 

One of the key factors that traders generally consider is the Forex spread. Therefore, it is advisable for beginner and intermediate traders to familiarize themselves with what the spread is in Forex trading. In short, the Forex spread is considered one of the trading costs in this market that brokers may charge their clients, and the amount of the spread in Forex varies depending on each trade.

Understanding the concept of spread in Forex, its impact, how to calculate it, fixed versus variable spreads, and a list of brokers with zero or low spreads are among the topics this article focuses on.

 

What is the spread in Forex and the meaning of spread in Forex in simple terms

Beginner traders may have often heard terms like Forex spread, gold spread, oil spread in Forex, lowest spread, spread indicator, etc., without knowing exactly what is meant by spread. At the beginning of the discussion, we will use a tangible real-world example to demonstrate what the spread in Forex is so that the meaning of Spread in Forex becomes clear. On the board of physical currency exchange offices, there are usually two prices: buy and sell, and the price at which the dealer sells you dollars is always slightly higher than the price at which they want to buy from you. This price difference is similar to the spread in Forex trading.

To further explain the meaning of spread in Forex, it should be noted that there are two prices for every currency pair:

1. Bid price (sell)

The price at which the trader can sell currency to the broker.

2. Ask price (buy)

The price at which the trader can buy currency from the broker.

Therefore, the spread in the Forex market is the difference between the Ask (buy) price and the Bid (sell) price. This price difference is the cost the trader pays to the broker for executing the trade. That is why as soon as we open a position, if we intend to trade at that same moment, a small loss is observed; this loss is the amount deducted from the trader's account as the spread.

 

How influential is the spread in the Forex market?

At first glance, a few pips of price difference may not seem significant, but the spread in Forex can be a vital factor in profitability, which of course depends on the trader's trading style:

 

Spread in day trading and scalping

For scalpers and day traders who open multiple trades throughout the day, the lowest spread in Forex is of great importance. When a trader's goal is to make a profit of just a few pips, paying a high spread can eliminate the profit from the trade.

 

Spread in long-term and swing trading

In long-term trading, for those who keep their positions open for weeks or months, the Forex spread becomes less important compared to short-term trades; because they consider other important factors, such as large gains versus the broker's spread cost.

 

How to calculate the spread in Forex trading with a practical example

Some traders look for how to calculate the spread in Forex trading so they can manage their potential costs. The basic formula for Forex spread is very simple:

Spread = Ask Price – Bid Price

Spread = Buy Price – Sell Price
 

Of course, there is no need for manual calculation to execute trades, and trading platforms automatically calculate the spread and display it to the trader.

 

How to calculate the spread in Forex for currency pairs and gold

In this section, with two practical examples, we will show how to calculate the spread in Forex for currency pairs and gold separately.

 

Example of currency pair spread in Forex

For the EUR/USD currency pair, we have the following information:

Ask (buy) price: 1.1052

Bid (sell) price: 1.1050

Buy and sell price difference: 0.0002

 

0.0002 = 1.1050 – 1.1052

 

In most currency pairs (except JPY), the fourth decimal digit is one pip. So here, the spread of the above currency pair is equal to 2 pips.

 

Example of gold spread in Forex

Due to the volatility of gold, traders look for the lowest gold spread at brokers. The following information for XAU/USD is available:

Ask (buy) price: 2030.50

Bid (sell) price: 2030.10

Buy and sell price difference: 0.40

 

0.40 = 2030.10 – 2030.50

 

To calculate pips in gold, the first decimal digit is calculated. Therefore, the resulting spread is 4 pips.

Spread calculation indicators and auxiliary tools

Indicators are tools that make the work easier. The spread calculation indicator is one of the practical tools that displays the real-time spread on the chart.

Using the spread indicator helps in the following cases:

• Be aware of spread widening.
• Determine the right time to enter a trade, especially in scalping.
• Estimate the transaction cost before entering.

Many professional traders who know what spread widening is, use combination tools such as the time-candle and spread indicator for MetaTrader 4 to view both the spread and the remaining time until the candle closes.

 

What are fixed and variable spreads? Key differences

Familiarity with the two terms fixed spread and variable spread and their differences is very important for choosing a broker. A fixed spread refers to a spread that always has a set amount and does not change under different conditions. A variable spread is a spread whose value changes based on supply and demand. The key differences between these two types of spreads are shown in the table below:

 

 

	Fixed Spread	Variable Spread
Fluctuation	Generally does not change	May increase during important news or market volatility
Cost	Higher than average variable spread	Lower than fixed spread and sometimes close to zero
Suitable for	News Trader	Short-term trader and scalping
Broker Type	Market Maker	ECN and STP

 

It is important to note that a broker with a fixed spread is suitable for strategies that are highly sensitive to costs. However, most traders prefer a variable spread due to its lower cost.

 

Comparing Broker Spreads | Broker with the lowest spread and broker with zero spread

One of the challenges for traders in cost management is finding the broker with the lowest spread. The competitive environment in the Forex market has led many brokers to claim to be the best broker with the lowest spread in Forex.

To compare broker spreads, it is necessary to examine the account type. Brokers that use STP, ECN, and ECN PRO accounts for trade execution have the lowest spreads or are zero-spread brokers and close to zero. Some brokers offer a zero-spread account (Zero Account), where their spreads start from zero; for example, in EUR/USD trades, there is a true zero spread.

Of course, to find the lowest spread broker, one must pay attention to the difference between spread and commission in Forex. Commission, which is the fee that brokers charge for executing trades and providing their services, is important alongside the low spread; a broker with a spread of 0.5 and a commission of $7 is more expensive than a broker with a spread of 0.8 and a commission of $3.

 

List of brokers with zero spread and zero-spread accounts

Some traders, in their strategies, prefer not to pay the spread cost and instead pay a fixed commission to have more accurate calculations. Below is a list of brokers with zero spread and zero-spread accounts:
 

 

Row	Broker Name	Account Type
1	Exness	Zero Account
2	XM	Zero and Ultra Low Account
3	HotForex	Zero Account
4	FP Markets	Raw Account

 

List of the best brokers with low spreads

Brokers with STP and ECN accounts are part of the list of best brokers with low spreads, which are included in the following list.

 

Row	Broker Name	Account Type
1	Pepperstone	Razor Account
2	Interactive Brokers	Pro Account
3	AvaTrade	Standard Account
4	NordFX	Zero Account
5	Windsor	Zero Account

 

It should be noted that choosing the right broker depends on the personal decision and trading strategy of the trader, and the above lists do not mean a recommendation of the broker.
 

Advanced Forex spread trading: Call spread strategy and trading tips

The concept of spread in Forex trading takes on more meaning at an advanced level. For example, in the call spread strategy (Call Spread), which is used in options contracts (Options). The call spread, which includes the two strategies of Bull Call Spread and Bear Call Spread, by combining buying and selling in options, allows traders to achieve their trading goals by setting a specific cap on profit and loss.

However, in Forex currency pair trading, traders use the following trading tips to manage the spread:

1. Avoid trading during important news to prevent spread widening.

2. Trade during London and New York sessions to take advantage of the lowest spreads.

3. Avoid entering a trade when an unusual spread level is displayed in MetaTrader.

 

Download time-candle and spread indicator for MetaTrader 4 and spread indicator for MetaTrader 5

Having the right tool is half the battle. Many trading platforms default to displaying the spread as small text that is difficult to read. For this reason, the spread in MetaTrader, using practical indicators, can be displayed more optimally for executing trades. The time-candle and spread indicator for MetaTrader 4 by viewing the remaining time until the candle closes and the spread amount, and the spread indicator for MetaTrader 5 by displaying the spread accurately with a suitable user interface, provide significant help in executing trades.

To download the time-candle and spread indicator for MetaTrader 4 click here.

https://www.mql5.com/en/code/download/11501.zip

 

To download the spread indicator for MetaTrader 5 click here.

https://www.mql5.com/en/code/download/2055.zip

 

Conclusion

A correct understanding of what spread in Forex means is the first step toward managing costs and capital in Forex. Remember that there should always be a logical balance between the services you receive from the broker and the costs you pay the broker for the spread in Forex trading. Finding brokers that have the lowest Forex spread, using the spread indicator, and choosing suitable trading hours helps significantly reduce costs and increase profitability.

 

Frequently asked questions about spread in Forex trading

Why does the spread differ in various sessions and at what hours is the spread lower?

The amount of spread in the Forex market is directly related to the market liquidity volume. The more traders active in the market, the smaller the gap between buy and sell prices becomes, and naturally, the lowest spread in Forex exists at these times.

 

How does zero spread work in Forex and is it real?

Yes. Zero spread in Forex is real; but it does not mean that the trading cost is zero. In ECN accounts, which generally have lower, near-zero, or zero spreads, the broker, in exchange for executing trades, charges a low variable spread along with a commission per traded lot.

‌

What is the difference between spread and commission in broker accounts?

The difference between spread and commission is as follows:

Spread: It is the difference between the buy and sell price that brokers charge as a trading cost. Brokers offer two types of fixed spread and variable spread in their accounts.

Commission: It is a fixed fee that the broker separately deducts from the account balance as a service charge.