Introduction#
Every time you open a forex trade, you pay a cost — even if your broker advertises "zero commission." That cost is the spread, and understanding how it works is one of the most practical things you can learn before trading.
If you have ever wondered what is spread in forex and why your trade starts slightly in the red, this article explains exactly what is happening, how to calculate it, and what makes spreads wider or tighter depending on the broker, the pair, and the time of day.
What Is a Spread?#
The spread is the difference between the bid price and the ask price of a currency pair. The bid is the price at which you can sell; the ask is the price at which you can buy. The gap between the two is the broker's primary way of earning revenue on each trade.
For example, if EUR/USD is quoted at 1.08501 / 1.08513:
- Bid (sell price): 1.08501
- Ask (buy price): 1.08513
- Spread: 0.00012, which equals 1.2 pips
When you buy EUR/USD at 1.08513, the market would need to move up by at least 1.2 pips before you break even. That difference is the spread cost.
Pips vs Points — Getting the Units Right#
Most retail brokers quote forex prices to five decimal places (three for JPY pairs). This creates a common source of confusion between pips and points.
- A pip is the fourth decimal place for most pairs: 0.0001
- A point (or pipette) is the fifth decimal place: 0.00001 — one-tenth of a pip
For JPY pairs like USD/JPY:
- A pip is the second decimal place: 0.01
- A point is the third decimal place: 0.001
When a broker platform displays a spread of "12 points" on EUR/USD, that means 1.2 pips. Always check whether your broker reports spreads in pips or points — the difference is a factor of ten.
How Spreads Work in Practice#
Brokers source their pricing from liquidity providers — typically large banks and financial institutions. The process works like this:
- The broker's system aggregates price quotes from multiple liquidity providers
- It selects the best available bid and the best available ask
- The broker either passes this raw spread directly to the trader (charging a commission instead) or adds a markup to the spread as its revenue
This creates two distinct account models used across the industry.
Standard accounts (spread markup, no commission)#
The broker widens the raw spread by adding a markup — typically 0.6 to 1.5 pips on EUR/USD. You pay no separate commission. A standard EUR/USD spread of 1.0–1.2 pips is common.
Raw spread / ECN accounts (pass-through spread + commission)#
The broker passes the raw interbank spread directly, which can be as low as 0.0 pips on EUR/USD during peak liquidity. Instead, you pay a flat commission — the industry standard is $3.50 per standard lot per side ($7.00 round turn) on MT4/MT5. This is verified from the pricing pages of IC Markets and Pepperstone as of early 2026.
Fixed vs Variable Spreads#
Variable (floating) spreads change continuously based on market supply and demand. They are tighter during high-liquidity periods and wider during news events or off-hours. Most major brokers — IC Markets, Pepperstone, Exness, OANDA, Interactive Brokers — use variable spreads.
Fixed spreads remain constant regardless of market conditions. The broker absorbs the risk of volatility, which means fixed spreads are typically set wider than the average variable spread to compensate. Fixed spreads are less common today but are still offered by some market makers.
For most traders, variable spreads on a raw account deliver lower total costs. Fixed spreads offer predictability but at a premium.
How to Calculate Spread Cost#
The formula is straightforward:
Cost = Spread (in pips) × Lot Size (in units) × Pip Value
For EUR/USD, where 1 pip = $0.0001 per unit:
| Lot Size | Units | Spread (1.2 pips) | Cost | |----------|-------|--------------------|------| | Standard | 100,000 | 0.00012 | $12.00 | | Mini | 10,000 | 0.00012 | $1.20 | | Micro | 1,000 | 0.00012 | $0.12 |
On a raw spread account with a 0.1 pip spread plus $7 round-turn commission, trading one standard lot of EUR/USD costs approximately $8 — compared with roughly $10–12 on a standard spread-only account.
What Typical Forex Spreads Look Like#
Spreads vary significantly by pair and account type. Here are verified average spreads from major brokers as of late 2025 / early 2026:
Raw / ECN accounts (+ commission)#
| Pair | IC Markets (avg) | Pepperstone Razor (avg) | |------|-------------------|-------------------------| | EUR/USD | 0.1 pips | 0.1 pips | | GBP/USD | 0.4 pips | 0.2 pips | | USD/JPY | 0.3 pips | 0.3 pips | | XAUUSD (Gold) | 2.3 points | 2.2 points |
Commission: $3.50 per lot per side on both brokers (MT4/MT5).
Standard / spread-only accounts (no commission)#
| Pair | Pepperstone Standard (avg) | CMC Markets (avg) | |------|----------------------------|---------------------| | EUR/USD | 1.1 pips | 0.65–0.7 pips | | GBP/USD | 1.2 pips | varies | | USD/JPY | 1.3 pips | varies |
CMC Markets also offers an FX Active account with raw spreads from 0.0 pips and a commission of $2.50 per $100,000 traded — a lower commission structure than the IC Markets / Pepperstone standard.
When Do Spreads Widen?#
Variable spreads are not constant. They widen when liquidity thins out or uncertainty spikes. The main scenarios:
Major news releases. During events like Non-Farm Payrolls (NFP) or FOMC rate decisions, liquidity providers widen their quotes or pull them entirely to manage risk. EUR/USD spreads that normally sit below 1 pip can spike to 5–20 pips or more in the seconds surrounding the release.
Market open and close. The forex market reopens on Sunday at 5 PM Eastern (early Monday in Asia). With only the Sydney session active, liquidity is thin and spreads widen noticeably — EUR/USD might show 3–10 pips instead of the usual sub-1 pip. A similar pattern occurs in the final hour before Friday's close.
Daily rollover. Around 5 PM Eastern each day, positions are rolled over to the next value date. Spreads briefly widen during this window.
Low-liquidity sessions. Trading EUR or GBP pairs during the Asian session means lower volume and wider spreads compared with the London–New York overlap (1 PM–5 PM UTC), when spread compression is at its tightest.
Flash crashes. Extreme events can make spreads effectively unquotable. During the January 2015 Swiss franc shock, the SNB removed the EUR/CHF 1.20 floor and the pair dropped approximately 30% in minutes. Liquidity vanished and multiple brokers — including Alpari UK, which entered insolvency — could not honour normal spread levels.
Common Mistakes#
- Confusing "from 0.0 pips" with average spread. The word "from" means the minimum ever observed, possibly for a fraction of a second. The average spread is what you actually pay most of the time. Always look for average spread data.
- Ignoring the commission on raw accounts. A raw spread of 0.0 pips is not free. If the commission is $7 per round turn, that is equivalent to a 0.7 pip all-in cost. Compare total costs, not just spreads.
- Assuming demo spreads match live spreads. Demo accounts frequently display artificially tight, stable spreads. Live accounts experience variable spreads, slippage, and widening during volatility. Brokers themselves acknowledge this difference.
- Thinking spreads are the only cost. Commissions, swap (overnight financing) fees, slippage, and currency conversion charges all add to total trading cost.
- Trading during the worst-spread windows. Opening positions during low-liquidity periods or seconds before major news releases means paying significantly more in spread costs.
Key Takeaways#
- The spread is the difference between the bid and ask price — it is the core transaction cost in forex trading
- Spreads are measured in pips (the 4th decimal place for most pairs, 2nd for JPY pairs)
- Raw spread accounts (0.0+ pips with commission) are typically cheaper overall than standard spread-only accounts
- Spreads widen during news events, off-hours, and low-liquidity periods — timing matters
- Always compare total cost (spread + commission) rather than spread alone
- You can verify live spreads from real broker terminals on Investucate's live spreads page