In forex trading, the spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair.
There are always two prices given in a currency pair, the bid and the ask price. The bid price is the price at which you can sell the base currency, whereas the ask price is the price you would use to buy the base currency.
The base currency is shown on the left of the currency pair, and the variable, quote or counter currency, on the right. The pairing tells you how much of the variable currency equals one unit of the base currency.
The buy price quoted will always be higher than the sell price quoted, with the underlying market price being somewhere in-between.
Most forex currency pairs are traded without commission, but the spread is one cost that applies to any trade that you place. Rather than charging a commission, all leveraged trading providers will incorporate a spread into the cost of placing a trade, as they factor in a higher ask price relative to the bid price. The size of the spread can be influenced by different factors, such as which currency pair you are trading and how volatile it is, the size of your trade and which provider you are using.
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
| Fixed Spread | Variable Spread |
|---|---|
| Could face requotes | No risk of requotes |
| Predictable transaction costs | Can get a tighter spread than fixed |
| Smaller capital requirements | Can reveal market liquidity |
| More appropriate for novice traders | More appropriate for experienced traders |
| A volatile market won't effect the spread | Spread can widen rapidly if there is high volatility |
| Likely to be exposed to slippage | Can be exposed to slippage |
The spread is measured in pips, which is a small unit of movement in the price of a currency pair, and the last decimal point on the price quote (equal to 0.0001). This is true for the majority of currency pairs, aside from the Japanese yen where the pip is the second decimal point (0.01).
When there is a wider spread, it means there is a greater difference between the two prices, so there is usually low liquidity and high volatility. A lower spread on the other hand indicates low volatility and high liquidity. Thus, there will be a smaller spread cost incurred when trading a currency pair with a tighter spread.
To start trading on the most popular forex pairs in the market, we have provided some suggestions here.
When trading, the spread can either be variable or fixed. Indices, for example, have fixed spreads. The spread for forex pairs is variable, so when the bid and ask prices of the currency pair change, the spread changes too.
Some of the benefits and drawbacks of these two types of spreads are outlined below:
Forex Accounts Management
Forex Accounts Management
If the forex spread widens dramatically, you run the risk of receiving a margin call, and worst case, being liquidated. A margin call notification occurs when your account value drops below 100% of your margin level, signalling you’re at risk of no longer covering the trading requirement. If you reach 50% below the margin level, all your positions may be liquidated.
It’s therefore important to gauge how much leverage you’re trading with and the size of your position. Forex pairs are usually traded in larger amounts than shares, so it’s important to remain aware of your account balance.
A forex spread is the difference between the bid price and the ask price of a currency pair, and is usually measured in pips. Knowing what factors cause the spread to widen is crucial when trading forex. Major currency pairs are traded in high volumes so have a smaller spread, whereas exotic pairs will have a wider spread. See our guide on risk management when trading.
We offer competitive spreads on a range of currency pairs, including major pairs such as EUR/USD and GBP/USD.
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Disclaimer
USP Capitals is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by USP Capitals or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
USP Capitals does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and USP Capitals shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
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