Guide to Foreign Exchange Spreads
Foreign exchange spreads are one of the most important variables that you'll need to consider when trading the Forex market. If you're unaware of what the Forex spread is, I can assure you it has nothing to do with whether you put butter or jelly on your toast in the morning while you're checking the market. If you're interested in seeing the latest spreads from many different brokers, scroll down to the comparison chart below.
What is the Forex Spread?
When you trade with Forex brokers, most of them are compensated by the Forex spread. This is basically the difference between the bid price and the ask price on Forex currency pairs. For example, if you look at your trading platform and you see a pair is quoted as 1.4352/1.4356, the difference between the two is 4 pips. In this case, the spread would be 4 pips. When you buy or sell this pair, the broker is going to pocket those 4 pips for taking the transaction for you.
Types of Spreads
Depending on what type of broker you use, you could encounter a few different types of foreign exchange spreads in your Forex trading.
Fixed Spreads - Many brokers offer fixed spreads to their traders. With this type of broker, you know exactly what the spread will be before getting into a trade. For example, your
might publish a list of spreads and you can find out that the EUR/USD pair has a fixed spread of 2 pips at all times. If it actually costs the broker more than that, they basically just eat the difference so that you can have a fixed spread at all times.
Variable Spreads - Some brokers use a variable spreads system instead of fixed spreads. With this type of spread, you will notice that it always fluctuates depending on market conditions. When liquidity is good, the spread might be extremely low. At other times, you might have much higher spreads than what you could get with a fixed spread.
Fractional Spreads - You could see fractional spreads regardless of whether you have a fixed spread or a variable one. This just means that you are dealing with a broker that uses five decimal places. For example, the spread could be 3.2 instead of 3. This just gives you a more exact quote and it can actually improve execution. If you are using a piece of scalping Forex trading software, you might actually get more trades because of this.
How it Impacts You
When you are trading in the
, the spread can impact your profitability. If you are using a piece of Forex software, it might only take trades when the spread is below a certain point. If this is the case, you may not get many trades when the spread is high.
The spread is essentially a type of transaction cost. This means that when you trade, you are paying the broker in the form of a spread. This eats into your profitability over the long-term. If you are using a trading strategy that aims for big wins, it may not affect you as much. If you are a scalper and you only shoot for 5-10 pips at a time, paying a 4 pip spread can be bad.
What Can Be Done About It?
If you are unhappy with your current spread situation, you can take a different approach. If you have a variable spreads broker, you may need to change the times that you trade. By trading at more liquid times, you could get better spreads.
You could also try changing brokers. You should be able to shop around and find out which brokers offer the lowest spreads. Before getting an account with a broker, it is usually a good idea to try out a demo accounts of you can see what their foreign exchange spreads are like in reality.
The chart below is a list of popular Forex brokers. If you want to see what the current spreads are from one of the brokers on the list, simply scroll to that broker and then click on the "Spreads" link next to the broker's name.
This tool gives you all kinds of information that you can use for comparison purposes also. If you want more info on brokers, check out our
Forex brokers page
to read the latest reviews.
Return From Foreign Exchange Spreads to Forex Market
Return From Foreign Exchange Spreads to Forex Trading