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In forex trading, the spread refers to the difference between the bid (sell) and ask (buy) prices quoted for a currency pair, serving as a transaction cost built into every trade. This bid/ask spread fluctuates in increments called pips, which denote changes in the fourth decimal place of a currency pair, or the second decimal place for pairs involving the Japanese yen.
The total cost of your trade is influenced by both the spread and the lot size. Forex brokers present two prices for a currency pair: the bid price for selling the base currency and the ask price for buying it.
Key Points
- The spread is the difference between the bid and ask prices of a currency pair, expressed in pips.
- Fixed spreads offer stability and predictability in costs, while variable spreads adjust with market conditions, providing cost efficiency but less predictability.
- Platforms like MetaTrader 4 and MetaTrader 5 offer tools for effective trading, with differences in features and spread costs impacting trader experience and expenses.
What Types of Spreads are in Forex?
In forex trading, the spread refers to the difference between the bid (sell) and ask (buy) prices quoted for a currency pair, serving as a transaction cost built into every trade. This bid/ask spread fluctuates in increments called pips, which denote changes in the last decimal place of a currency pair.
Check out Vantage Australia’s forex spreads, competitive rates starting from 0.0 pip!
The cost of trading is influenced by both the spread and the lot size. Forex brokers present two prices for a currency pair: the bid price for selling the base currency and the ask price for buying it.
How to Calculate Forex Spreads
Before diving into how to calculate forex spread, it’s important to understand the different forex terms:
- Bid Price
The price at which buyers are willing to purchase a currency pair in the forex market.
- Ask Price
The price at which sellers are willing to sell a currency pair in the forex market.
- Tight Spread / Low Spread
A small difference between the bid and ask prices, indicating low trading costs and high liquidity.
- Wide Spread / High Spread
A large difference between the bid and ask prices, signifying higher trading costs and lower liquidity.
- Pip
A “pip” represents the smallest price movement in a forex currency pair and stands for “percentage in point.”
Typically, forex currency pairs are quoted to four decimal places, with a pip referring to a change in the fourth decimal place. This can be represented by the bolded numbers in the below table.
| EUR (Base Currency)/USD (Quote Currency) | |
| Bid Price | Ask Price |
| 1.0630 | 1.0635 |
To calculate the spread, which is the difference between the buy and sell prices expressed in pips, we can use the following formula:
Spread = Ask price – Bid price = 1.0635 – 1.0630 = 0.0005 (5 pips)
Types of Spreads in Forex
In forex trading, spreads are categorised into two main types:
- Fixed Spread
- Variable Spread
Each type offers distinct advantages and disadvantages, crucial for traders to understand when navigating the currency markets.
Here’s a breakdown of both spread types:
| Spread Type | Advantages | Disadvantages |
| Fixed Spread | 1. Predictable trading costs are beneficial for advanced budgeting and strategy planning. 2. Ideal for automated trading systems as the spread remains the same. 3. Less risky during volatile market conditions as the spread does not widen. | 1. Typically higher than variable spreads under normal market conditions. 2. Fixed spreads offer limited flexibility, as they remain constant even when market conditions could allow for a narrower spread. |
| Variable Spread | 1. Lower average costs compared to fixed spreads during less volatile periods. 2. More transparent as it reflects real market conditions and liquidity. | 1. Spreads can widen significantly during major economic announcements or market volatility, increasing trading costs. 2. Less predictable, making budgeting and planning more challenging. |
Why do Forex Spreads Matter?
Forex spreads play a crucial role in trading, as they directly impact transaction costs and overall returns. Whether you’re a short-term trader making multiple trades a day or a swing trader holding positions for weeks, understanding how spreads affect your strategy is key to managing your trading costs and maximising returns.
Trading Costs & Profitability
- The spread will directly impact your trading costs and profitability.
- A wider spread increases transaction costs, while a narrow spread reduces trading expenses.
How Spread Impacts Different Trading Strategies
The importance of spreads varies depending on your trading style. Here’s how different traders are affected:
Day Trading
Day traders hold positions for minutes or hours, aiming to profit from small price movements.
Low spreads are important because they reduce transaction costs, making it easier to enter and exit trades quickly. A tighter spread allows day traders to capture more returns from small price changes.
Swing Trading
Swing traders hold trades for several days or weeks, so spread size is less critical than in day trading. Since their trade targets are larger, small variations in spreads don’t impact returns as much. That said, choosing a broker like Vantage, which offers competitive spreads, can still help improve your potential returns.
Position Trading
Position traders hold trades for weeks or months, focusing on long-term market trends rather than short-term fluctuations. Since they aim for larger price moves, spreads have less impact on their overall returns.
Forex CFD Trading Platforms
There are a wide variety of forex trading platforms in Australia for traders to choose from including popular platforms such as MetaTrader 4 and MetaTrader 5.
MetaTrader 4
MetaTrader 4 (MT4), created by MetaQuotes in 2005, is a popular trading platform that can be installed on both desktop and mobile devices. It offers a flexible trading system with advanced market analysis tools, customisable charts, and the ability to use Expert Advisors (EAs) for algorithmic automation, enhancing the precision and efficiency of trading strategies.
The platform’s user-friendly interface ensures that even novice traders can easily understand and utilise its comprehensive functionalities. Learn more about the MetaTrader 4 (MT4) platform here.
MetaTrader 5
MetaTrader 5 (MT5) is the advanced successor to MetaTrader 4, developed by MetaQuotes for trading forex, futures, and other assets. This multi-asset platform is renowned for its sophisticated features, including the latest enhancements like fully activated Expert Advisors (EA), signals trading, and comprehensive hedging capabilities.
Learn more about the MT5 platform or read our article covering the differences between MT4 and MT5 to help traders understand better.
TradingView
To introduce TradingView as a popular and advanced platform for forex CFD trading, highlighting its unique features, capabilities, and benefits for traders.
TradingView is a leading forex CFD trading platform, known for its advanced charting tools and real-time market data. It offers over 100 technical indicators, 15+ chart types, and 90+ drawing tools, making it ideal for both beginner and experienced traders. With 12 customisable alert conditions, traders can stay on top of market movements and make informed decisions quickly.
The platform’s cloud-based accessibility allows traders to analyse the markets and execute trades from any device. TradingView also features a strong social trading network, where over 50 million traders share insights and strategies, helping you stay ahead of market trends.
Learn how to unlock the full potential of TradingView with our comprehensive guide.
Vantage Australia Trading Platform
While third-party platforms like MT4 and MT5 are widely used, Vantage offers a fully regulated and award-winning trading platform, designed for optimal forex CFD trading conditions.
Trade with ultra-competitive spreads starting from 0.0 pips for RAW accounts and 1.0 pip for standard accounts. Benefit from lightning-fast execution speeds, real-time market insights and advanced trading tools.
With a seamless multi-device experience across desktop, web, and mobile, Vantage delivers a transparent, professional-grade trading environment trusted by traders worldwide. Read more about Vantage Australia here.
Start trading with Vantage today – open a live trading account!
Summary
In summary, the spread is used to represent a part of the transaction costs and is defined as the difference between the bid (sell) and ask (buy) prices of a currency pair. Each spread type comes with its own advantages and disadvantages and it’s important for traders to understand them.
Trading platforms like MT4 and MT5 provide robust tools for analysis and trading, featuring customisable charts and algorithmic trading capabilities through EAs.
Frequently Asked Questions
What is forex trading?
Forex trading, also known as foreign exchange trading, involves buying and selling currencies to take advantage of changes in exchange rates. As one of the largest and most liquid financial markets globally, it provides traders with opportunities to capitalise on currency price fluctuations.
What does spread mean?
A spread is the difference between the buying price (bid) and the selling price (ask) of a financial instrument. It represents the cost of trading and can vary depending on market conditions and liquidity.
What affects forex spreads?
Forex spreads are influenced by factors such as market volatility, liquidity, and economic events. High volatility and low liquidity can widen spreads, while stable market conditions often result in tighter spreads. Major news releases and central bank decisions can also cause spreads to fluctuate.
Is a higher or lower spread better?
A lower spread is generally better for traders because it reduces the cost of entering and exiting trades. Lower spreads mean you pay less in transaction fees, which can improve your overall returns. Higher spreads can reduce your potential returns, especially in fast-moving markets.
What is a good spread in forex?
A good spread in forex is typically low and stable, especially for major currency pairs like EUR/USD and USD/JPY. Spreads of 1 to 2 pips are considered favourable for most major pairs under normal market conditions, as lower spreads can help reduce trading costs.
What are the different types of trading costs?
There are a few different types of trading costs, such as commissions, swaps, and spreads. Here is a brief explanation of each:
- Commissions – Fixed fees charged by brokers for opening and closing trades. Some brokers offer commission-free trading but may widen the spread instead.
- Swaps – Overnight fees or credits applied when holding a position past the trading day, based on interest rate differentials between currencies.
- Spreads – The difference between the buying price (bid) and the selling price (ask) of a currency pair, representing the broker’s markup.
