Forex Spread Difference - Everything a Trader should Know

Spread difference or bid-ask spread or simply spread is a common forex trading term with high significance on trading profit and loss. In simplest words this means cost of trading. Spread difference is defined as the difference between ask and bid prices for a currency pair offering by a foreign exchange trading broker. And, it can also regard as the fees charged by the brokerage firm for executing the trades. Unlike most other financial instrument trading, currency trades do not include any direct brokerage commission or market maker fees.

The forex spread difference is presented in pips, the smallest unit of price change. For example, if the currency trading platform shows a bid price of 1.3012 and an ask price of 1.3014 for EUR/USD currency pair then the spread difference is 2 pips. And, if the platform shows a bid price of 1.30193 and an ask price of 1.30208 then the difference is in 1.5 pips.

Over the past the spreads have become increasingly tight. This has resulted in great reduction in cost of trading and more profitability for the traders. Before seven years or so, the tightest spread available for trading most popular currency pairs was 5 pips. So a trader trading a standard lot of EUR/USD currency pair should suffer a $50 worth transaction cost ($0.0005 x 100000). But now most brokers charge 2 pips or less. So a trader having standard position size should pay only $20 towards transaction cost. Also, from a trader point of view, with wider spreads a profitable trade can only be executed when there is price swings exceeding the spread difference. For example, with 5pip spreads the profit can only be realized with the price swings 6 pips or more favoring the trader. But today’s traders require much lower price swings to profit from the market. The increasing popularity of forex trading, ever-increasing transaction volume and high brokerage competition are the main driving factors of these spread tightening.

The ask-bid spread offered by forex brokers depend on many things like the currency pair, market liquidity and brokerage service. Usually the most popular currency pairs have the tightest spreads, and EUR/USD is so far the most liquid and tightest spread pair in the market. Brokerage firms offer spreads in fixed, variable and in combination options. Fixed spreads are flat and pre-determined pip differences for respective currency pairs. Variable spreads means tighter pips when market is liquid for the pair and wider when the market is less liquid. Some brokerage firms offer combination of both to help traders to choose their option on each trade.