What Is a Forex Spread?
Bid vs Ask Price Explained
The bid price is what you’d get selling the base currency; the ask price is what you pay to buy it. The difference is the spread—the broker’s built-in fee.
How Spreads Are Measured in Pips
Spreads are quoted in pips, the smallest standardized measure (typically 0.0001 for most pairs, and 0.01 for JPY pairs). For example, if EUR/USD is quoted at 1.1389/1.1392, the spread is 3 pips.
Fixed vs Variable Spreads: A Quick Overview
- Fixed spreads remain constant, even during volatility—offered by market-maker brokers.
- Variable spreads widen during news or low liquidity and tighten during calm, liquid conditions.
How Is the Forex Spread Calculated?
The Formula for Spread
Spread (pips) = Ask Price – Bid Price
Role of Currency Pairs and Liquidity
High-liquidity pairs like EUR/USD have smaller spreads. Exotics or illiquid pairs cost more to trade.
Examples of Spread Calculations
- EUR/USD 1.1050/1.1052 → 2 pips
- USD/JPY 110.00/110.04 → 4 pips
What Factors Affect Forex Spreads?
Market Volatility and Economic News
Major announcements (like inflation data or central bank decisions) heighten uncertainty. Brokers widen spreads to hedge risk.
Time of Day and Trading Sessions
Spreads are tightest during US–London overlap when liquidity is highest, and wider during off-hours (like Asian-only session).
Liquidity and Currency Pair Type
Major pairs provide depth and competition among price makers. Exotics are thinly traded, thus more expensive to trade.
Broker Type (ECN vs Market Maker)
- Market-makers often offer fixed spreads, but can manipulate them.
- ECN/STP brokers offer variable spreads, passing on real market pricing, sometimes adding commissions.
Why Are Forex Spreads So High Right Now?
Recent Economic and Geopolitical Events
Trade tensions (e.g., U.S.–China) have increased currency volatility. April even saw multi-year highs in FX volatility, pushing spreads wider.
Central Bank Activity and Interest Rate Differentials
Diverging rate policies—Fed keeping rates higher vs ECB cutting—create wide interest rate gaps, impacting liquidity and spreads.
Reduced Market Liquidity
Global QT (quantitative tightening) and policy uncertainty have thinned banking reserves and liquidity, amplifying spreads.
Impact on Traders (Including Margin Calls)
Wider spreads increase entry/exit costs. During news events or overnight holds, this can trigger margin calls or premature stops.
Fixed vs Variable Spreads: Which Should You Choose?
Advantages and Disadvantages of Fixed Spreads
- Pros: Cost predictability
- Cons: Might be wider in calm times, can widen during broker-triggered volatility
Pros and Cons of Variable Spreads
- Pros: Tight during peak liquidity
- Cons: Can spike unpredictably during news
Choosing the Right Spread Type for Your Strategy
- Use fixed for stable strategies and beginners.
- Use variable for scalping and professional approaches—monitor spreads diligently.
Tips for Managing High Spreads
Choosing the Right Broker
Choose regulated ECN or STP brokers with transparent pricing. Compare real-time spreads during different market conditions.
Trading During Optimal Times
Trade during London–New York overlap and avoid high-impact news periods. Use pending orders to avoid spread spikes.
Risk Management Techniques
- Keep leverage conservative
- Expect wider spreads in conditions
- Use stop-loss orders away from spread spikes to avoid margin calls
Conclusion: Understanding and Adapting to High Forex Spreads
High spreads right now reflect a cocktail of market volatility, central bank policy divergence, and reduced liquidity. To thrive:
- Understand spread mechanics,
- Time your trades intelligently,
- Choose brokers wisely,
- And manage risk proactively.
FAQ
Because liquidity drops during off-peak hours, meaning fewer trade participants—leading brokers to widen spreads.
Yes—wider spreads widen the loss zone. Combined with high leverage, this can cause margin calls even on profitable holdings.
They usually are, except in rare conditions broker-triggered or event-driven widening may occur.
For majors like EUR/USD, ~1–2 pips is healthy. Spreads above 3–5 pips may signal volatile or illiquid conditions.
About the Author
Andrew Edwards is the co-founder of SecretsToTrading101 and has years of practical experience in online trading, prop firm evaluations and financial content review. He specialises in helping traders understand trading rules, challenge requirements and platform conditions so they can make informed decisions. Andrew oversees the accuracy of our prop firm guides and ensures all information is reviewed against current firm terms and risk standards.
