Understanding Forex Spreads and Commissions
Every time you place a forex trade, you pay a cost. Understanding these costs is crucial for profitable trading.
What is a Spread?
The spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair.
Example: If EUR/USD shows Bid: 1.0800 / Ask: 1.0802, the spread is 2 pips.
When you open a trade, you immediately start with a small loss equal to the spread. The price must move in your favor by at least the spread amount before you break even.
Types of Spreads
Fixed Spreads:
- Remain constant regardless of market conditions
- Easier to calculate trading costs
- Usually wider than variable spreads
Variable (Floating) Spreads:
- Change based on market liquidity and volatility
- Can be very tight during high-liquidity sessions
- May widen significantly during news events or low-liquidity periods
Typical Spreads for Major Pairs
| Pair | Typical Spread | During News |
|---|---|---|
| EUR/USD | 1.0-1.7 pips | 3-8 pips |
| GBP/USD | 1.2-2.0 pips | 4-12 pips |
| USD/JPY | 1.0-1.5 pips | 3-8 pips |
| AUD/USD | 1.2-1.8 pips | 3-10 pips |
How Spreads Affect Your Trading
The tighter the spread, the less the market needs to move for you to profit. This is especially important for:
- Scalpers — who target small price movements
- EAs — automated systems that may trade frequently
- High-frequency traders — where costs compound rapidly
Calculating Your Trading Costs
Cost per trade = Spread × Lot Size × Pip Value
For EUR/USD with a 1.5 pip spread trading 1 standard lot:
- Cost = 1.5 × $10 = $15 per round trip
For a micro lot (0.01):
- Cost = 1.5 × $0.10 = $0.15 per round trip
Tips to Minimize Trading Costs
- Choose a broker with competitive spreads — compare across multiple brokers
- Trade during high-liquidity sessions — London and New York sessions offer tightest spreads
- Avoid trading during major news releases — spreads can widen dramatically
- Focus on major pairs — they have the tightest spreads
- Consider your trading frequency — fewer, higher-quality trades reduce total cost
Commission-Based vs Spread-Based Accounts
Some brokers offer accounts with raw spreads (near zero) plus a fixed commission per lot, while others build the cost into wider spreads:
- Standard Account: Wider spread (e.g., 1.6 pips), no commission
- Raw/ECN Account: Tight spread (e.g., 0.1 pips) + commission (e.g., $3.50/lot per side)
Calculate which option is cheaper based on your trading volume and style.
This article is for educational purposes only and does not constitute financial advice. Trading forex carries significant risk of loss.