Introduction: What Is a Spread in Trading?
In trading, a "spread " is the difference between two prices: the bid price and the ask price. The bid price is the highest amount a buyer is willing to pay for an asset, while the ask price is the lowest amount a seller is willing to accept. This gap is an important cost for traders and a way for brokers to earn money.
Spreads exist in all types of markets, including foreign exchange (forex), stocks, commodities, and contracts for difference (CFDs). For example, in forex trading, if the currency pair EUR/USD has a bid price of 1.1000 and an ask price of 1.1002, the spread is 0.0002, or 2 pips.
Example:
Bid price: 1.1000
Ask price: 1.1002
Spread: 2 pips (this is the cost to open the trade)
For traders, smaller spreads mean lower costs, which can increase profits, especially for those who trade frequently, like scalpers or day traders.
How Spreads Work
When you make a trade, you incur a cost that is included in the process of opening a position. Here’s how it works step by step:
Bid and Ask Prices
Bid price: The price at which you can sell an asset.
Ask price: The price at which you can buy an asset. The difference between these two prices is called the spread.
Spread as a Trading Cost
When you open a position, you start with a small loss equal to the spread. For you to break even, the market must move in your favor by at least the size of the spread.
Spread Size
Spreads are measured in pips for forex or in price points for other markets, indicating the cost of trading. Major forex pairs, like EUR/USD, often have very tight spreads (0.1–2 pips), while exotic pairs or less popular assets can have much wider spreads.
Broker Pricing Models
Market Maker brokers often provide fixed price differences that remain constant, even during market fluctuations.
ECN/STP brokers typically provide variable spreads, which can change based on market conditions but are often narrower during normal trading times.
Example: If the bid price of GBP/USD is 1.2500 and the ask price is 1.2503, the spread is 3 pips. If you buy at 1.2503, the price must rise to at least 1.2506 for you to cover the cost.
Types of Spreads (Fixed vs. Variable)
Brokers generally offer two types of spreads: fixed and variable (also known as floating). Each type has its advantages and disadvantages, depending on your trading style.
Fixed Spreads
The gap between the bid and ask prices stays consistent, no matter the market conditions. This type is common with market maker brokers and is easier for beginners to understand since the costs remain the same.
Downside: Fixed spreads are usually higher than average variable spreads, especially during calm market conditions.
Example: If EUR/USD always has a 2-pip spread, it remains the same whether the market is quiet or highly active.
Variable (Floating) Spreads
The gap between bid and ask prices changes based on how many buyers and sellers are in the market and how much prices are moving. This type is common with ECN/STP brokers and can be very low during times of high liquidity (like when the London and New York markets overlap).
Downside: Spreads can widen significantly during news releases or times of low liquidity.
Example: EUR/USD might have an average spread of 0.2–0.5 pips during busy hours but could widen to 3–5 pips during major news events.
Which Is Better?
Fixed spreads: Ideal for beginners and those who want predictable costs.
Variable spreads: Better for active traders, scalpers, and those trading during busy market hours.
Tip for beginners: If you are just starting, a fixed-spread account may feel safer. As you gain experience, you might prefer the flexibility and lower costs of variable spreads.
Why Low Spreads Matter for Traders
Spreads are a hidden cost of trading. The smaller the price difference, the less the market needs to move in your favor for you to make a profit. Here’s why low spreads are important:
Lower Trading Costs
Narrower price gaps decrease the expenses associated with entering and exiting trades. This is especially crucial for scalpers and day traders who make many trades in one session.
Faster Break-Even Point
With low spreads, trades can reach break-even more quickly. Broader price gaps require more significant market movements just to break even.
Better for High-Frequency Strategies
Techniques such as scalping and algorithmic trading rely on seizing minor market fluctuations. Low spreads make these strategies more effective.
Greater Profit Potential
The lower your costs, the greater your retained profit. Over time, this difference can add up significantly.
Transparency and Fair Pricing
Low spreads often indicate access to true market pricing, especially with ECN/STP brokers. This creates trust and reduces conflicts of interest.
Example: A scalper executes 20 trades in a day, aiming for 5 pips profit each time.
With a 2-pip spread, the trader keeps 3 pips per trade, totaling 60 pips.
With a 0.5-pip spread, the trader keeps 4.5 pips per trade, totaling 90 pips.
The difference in spreads increases overall profit by 50%.
Factors That Affect Spreads
Price differences can change; they can widen or tighten due to several factors. Here are the main ones:
Market Liquidity
High market activity leads to smaller spreads: Major forex pairs like EUR/USD or USD/JPY often have spreads below 1 pip during busy trading hours.
Low trading activity leads to wider price differences: Exotic pairs or niche assets usually have wider price differences due to fewer buyers and sellers.
Market Volatility
During major news releases (like interest rate changes), spreads can widen significantly as prices shift quickly and liquidity providers protect themselves.
Time of Day
Price differences are typically lowest during high-volume trading sessions (such as when London and New York markets overlap) and widest during off-hours (like when the Asian session closes or before major markets open).
Broker Type
Market makers often offer fixed spreads but at slightly higher levels. ECN/STP brokers provide variable spreads that can be very low under normal conditions.
Asset Class
Forex majors typically have the lowest spreads.
Commodities and indices have moderate spreads.
Cryptocurrencies and exotic pairs often have higher spreads due to volatility and limited liquidity.
Account Type
Some brokers offer specialized low-spread accounts (like ECN or Pro accounts) with raw spreads but charge a commission per trade.
Example: EUR/USD might have a 0.2-pip spread during London trading hours but widen to 3–5 pips during significant news events like Non-Farm Payrolls.
Spread Costs in Practice – Examples
To understand how price differences affect real trades, let’s look at a few simple scenarios.
Example 1: Tight Spread (Advantage)
Instrument: EUR/USD
Bid/Ask: 1.1000 / 1.1001
Spread: 1 pip
Trade size: 1 lot (100,000 units)
Cost: Each pip = $10 → Spread cost = $10
Example 2: Wide Spread (Disadvantage)
Instrument: GBP/JPY
Bid/Ask: 160.000 / 160.050
Spread: 5 pips
Trade size: 1 lot
Cost: Each pip ≈ $9 → Spread cost = $45
Example 3: Scalper Impact
A scalper opens 20 trades per day on EUR/USD.
With a 1-pip price difference, total daily transaction costs = $200 (20 × $10).
With a 0.2-pip spread, total daily spread costs = $40 (20 × $2).
Savings: $160 per day just from lower spreads.
Example 4: Commission + Low Spread
An ECN broker offers a raw spread of 0.1 pip but charges a $7 commission per lot.
Cost = $1 (spread) + $7 = $8 total per trade.
This is still cheaper than paying a 2-pip spread ($20 cost).
Lesson: Even small changes in spreads can greatly affect your costs, especially if you trade often. Over weeks or months, low spreads can save thousands in trading costs.
Spreads vs. Commissions
When trading, your costs typically come from two main sources: spreads and commissions. How these are charged depends on the broker and account type.
Spread-Only Accounts
Brokers include their fee in the spread. No separate commission is charged. This is simpler for beginners, but spreads are usually wider.
Example: EUR/USD spread = 2 pips. Cost = $20 per lot (no commission).
Commission + Raw Spread Accounts
Brokers provide access to raw market spreads, often close to 0.0 pips. A fixed commission is charged per trade (e.g., $6–$10 per lot). This is popular with ECN/STP brokers.
Example: EUR/USD spread = 0.2 pips ($2) + $7 commission = $9 total cost, which is cheaper than a wider 2-pip spread.
Which Is Better?
Spread-only accounts are easier for beginners who want predictable costs.
Commission + raw spread accounts are better for scalpers, day traders, and professionals who prioritize low costs on frequent trades.
Tip for traders: Always calculate your total trading cost (spread + commission) before choosing an account type.
Who Benefits Most From Low Spreads?
While all traders can save money with lower spreads, some groups benefit more than others:
Scalpers
Scalpers make many trades daily, often targeting just a few pips of profit. Low spreads are crucial; even a 1-pip difference can determine if their strategy is successful.
Day Traders
Day traders also make multiple trades in a session. Lower spreads help reduce transaction costs and improve overall returns.
High-Frequency and Algorithmic Traders
Trading bots and algorithms rely on efficiency. Very low spreads allow strategies based on small price movements to remain viable.
Large-Volume Traders
Professional traders who trade multiple lots at once save significantly on costs when spreads are tight.
Active Forex and CFD Traders
Forex majors (like EUR/USD, GBP/USD, USD/JPY) often have the tightest spreads, making them appealing for active traders who want efficient execution.
Example: A scalper making 50 trades a day with 1 lot each could pay $500 in costs with a 1-pip spread but only $100 with a 0.2-pip spread, resulting in massive savings over time.
How to Find Brokers With Low Spreads
Not all brokers provide the same pricing, so it’s important to compare them thoroughly. Here’s how to find trustworthy brokers with competitive spreads:
Check Regulation
Always start with a regulated broker (like those regulated by FCA, ASIC, CySEC, NFA, etc.). The safety of your funds is more important than just having tight spreads.
Compare Spreads on Major Pairs
Most brokers advertise spreads on popular pairs like EUR/USD or GBP/USD. Look for brokers that offer average spreads below 1 pip on these pairs.
Consider Account Types
Standard accounts: Have wider spreads and no commission.
ECN/Pro accounts: Offer raw spreads (close to 0.0 pips) plus a commission. Choose based on your trading style.
Review Trading Conditions
Check for:
Commission rates (per lot).
Swap/overnight fees.
Minimum deposit requirements.
Test in a Demo or Small Account
Before committing, test the broker’s price differences in real market conditions. Some brokers may advertise low spreads but widen them during volatile events.
Watch for Hidden Costs
Avoid brokers that have:
Unexplained “administration” fees.
High withdrawal charges.
Slippage disguised as spread widening.
Tip for beginners: A great starting point is to visit our Best Low-Cost Brokers of 2025 page, where you can compare brokers side by side based on pricing, regulation, and trading conditions.
Quick Glossary of Spread Terms
Spread: The difference between the bid (sell) and ask (buy) price of an asset.
Bid Price: The highest price a buyer is willing to pay.
Ask Price: The lowest price a seller is willing to accept.
Pip: The smallest standard unit of movement in forex trading (usually 0.0001 for most pairs).
Fixed Spread: A spread that remains constant, regardless of market conditions.
Variable (Floating) Spread: A spread that changes based on liquidity and volatility.
Raw Spread: The true bid-ask difference from liquidity providers, often near 0.0 pips, usually paired with a commission.
Commission: A broker fee charged per trade in addition to spreads, common with ECN accounts.
Depth of Market (DOM): A tool showing available buy and sell orders at different price levels.
Slippage: When an order is executed at a different price than requested, often during high volatility.
All-In Cost: The total cost of a trade, including spreads, commissions, and any other fees.
Final Thoughts / Next Steps
Spreads may seem like a small detail, but they play a significant role in overall trading expenses and profitability. Every trade starts with the spread as a built-in expense, so the narrower the price difference, the quicker you can break even and retain more of your earnings.
Here’s the best approach for traders:
Understand spreads first: Know how they work and how they affect your trades.
Choose the right account type: Fixed spreads for predictability, or raw spreads + commission for lower long-term costs.
Factor in total costs: Always consider both price differences and commissions before evaluating a broker’s pricing.
Trade liquid markets: Focus on major forex pairs or high-volume assets where spreads are naturally tighter.
Select a regulated broker: Narrow price differences are beneficial only if your funds are secure.
Over time, reducing trading costs can significantly impact your overall results, especially for active traders. By choosing the right broker and account type, you can trade more efficiently and keep more of your profits.
Legal Disclaimer
This content is for educational purposes only. Nothing on this page is financial advice or a solicitation to buy or sell any security, derivative, or broker service. Trading involves risk. Past performance does not guarantee future results. Always verify broker licensing on official regulator registers before opening an account.
Continue Your Trading Journey
If you’re ready to explore new markets, our next guide, "What Is Futures Trading – A Beginner’s Guide," explains how futures contracts work, why traders use them, and the steps to start trading futures safely.
If you’re looking for brokers with the best pricing, visit our "Best Low-Spread Forex Brokers of 2025" page for a side-by-side comparison of trusted, regulated brokers offering tight spreads and fair trading conditions.
Beginner FAQ
What is a spread in simple terms?
A spread is the difference between the buying price (ask) and the selling price (bid) of a financial instrument. It represents the cost of opening a trade.
What is a good price difference in forex?
For major currency pairs like EUR/USD, a good spread is usually below 1 pip during active trading hours.
Do low spreads always mean better trading conditions?
Not always. Some unregulated brokers might promote very low price differences but could have hidden fees or execution problems. Always consider the total cost and choose a regulated broker.
Why do spreads widen?
Spreads can widen during times of high volatility, major news releases, or periods of low liquidity (like late market hours).
Are spreads the same for all brokers?
No. Spreads vary depending on the broker, account type, and whether the broker uses a market maker or ECN/STP model.
Which traders benefit most from low spreads?
Scalpers, day traders, and high-volume traders benefit the most because they open multiple trades and need costs as low as possible.
Can spreads be zero?
Some ECN brokers offer raw spreads close to 0.0 pips, but they charge a commission per trade. The actual cost is the spread plus the commission combined.
What’s better: fixed or variable spreads?
Fixed spreads offer predictable costs, making them better for beginners. Variable spreads usually have lower average costs, making them better for active traders.
How can I check a broker’s spreads?
Most brokers publish average spreads on their website.
