Forex spreads play a critical role in every trade you make in the foreign exchange market. Whether you’re just starting or already trading full-time, understanding forex spreads is essential. This cost can determine the difference between a winning and losing trade.
Forex spreads are the primary way brokers earn from your trades. If you want to become consistently profitable, you must understand the types of forex spreads, how they work, and which one fits your strategy. In this article, we explain forex spreads in a simple yet detailed way. We’ll explore fixed vs variable spreads, how the bid-ask spread in forex works, and compare ECN vs market maker brokers using real examples.
Let’s start with the basics.
What Is a Forex Spread?
A forex spread is the difference between the bid and ask price of a currency pair. The bid price is what the broker will pay to buy a currency. The ask price is what the broker wants in return to sell it. The spread is measured in pips, which is the smallest movement a currency can make.
For example, let’s say EUR/USD is quoted as:
- Bid: 1.1050
- Ask: 1.1052
The spread here is 2 pips. This difference is what you pay the broker for facilitating your trade.
The bid-ask spread in forex constantly changes based on market activity, liquidity, and economic news. During major events or low liquidity hours, this spread can widen. That makes every trade more expensive.
Why Forex Spreads Matter in Trading
Even though the forex spread seems small, it can add up quickly. Imagine you’re a scalper, making 20 trades a day. If each trade costs you 2 pips, you’ve spent 40 pips in spreads alone. That cost could eat into your profits fast.
Now let’s say you trade during news releases. You enter expecting a quick 10-pip gain, but the spread widens to 5 pips. Your profit potential is instantly cut in half. That’s why understanding the bid-ask spread in forex is so important.
Forex spreads also vary by broker. ECN vs market maker brokers offer different pricing models, which affects the spread you get. Choosing the right broker based on spread behavior can dramatically improve your results.
Types of Forex Spreads: A Simple Breakdown
There are two main types of forex spreads you’ll encounter:
- Fixed spreads
- Variable (or floating) spreads
Each has its advantages and risks. Knowing the difference helps you choose wisely depending on your trading style and strategy.
Let’s explore each one in detail.
Fixed Spreads: Predictable Costs for Consistent Trading
Fixed spreads do not change with market conditions. They remain the same regardless of volatility or liquidity. These spreads are offered mostly by market maker brokers.
Market makers create their own prices rather than pulling them from the interbank market. This gives them more control over the bid-ask spread in forex and helps offer fixed spreads to traders.
Benefits of Fixed Spreads:
- Predictable trading costs
- Great for beginners
- No sudden spikes during news events
- Ideal for automated trading systems
Drawbacks:
- Generally wider than variable spreads
- Prone to requotes during high volatility
- Slippage may occur if price moves fast
For example, a broker may offer a fixed spread of 3 pips on EUR/USD. It stays at 3 pips even during volatile moments like central bank announcements. That predictability helps you manage your risk better.
Fixed spreads are perfect if you value consistency and don’t trade news events.
Variable Spreads: Real-Time Pricing with Market Volatility
Variable spreads, also known as floating spreads, change based on market activity. They are offered by ECN and STP brokers, who pull quotes directly from liquidity providers.
These brokers don’t interfere with your trade. They simply pass your order to the market. The result is a live, constantly changing bid-ask spread in forex.
Benefits of Variable Spreads:
- Tighter spreads during stable markets
- No requotes, as orders are sent directly to the market
- More transparent pricing
Drawbacks:
- Can spike during high-impact news
- Harder to manage for short-term traders
- Riskier for inexperienced traders
Let’s say during calm hours, the spread on GBP/USD is just 0.6 pips. But when the U.S. Non-Farm Payroll report is released, it might jump to 5 or 6 pips. That’s the trade-off for real-time pricing.
Scalpers and day traders often prefer variable spreads—especially during high liquidity periods.
ECN vs Market Maker Brokers: Who Offers What?
Understanding ECN vs market maker brokers helps you decide which spread type you’ll encounter.
ECN Brokers:
- Offer variable spreads
- Charge a small commission per trade
- Connect your order to the interbank market
- No dealing desk involved
Market Maker Brokers:
- Offer fixed spreads
- May act as the counterparty to your trade
- Can manipulate prices to control risk
- Often suited for beginner traders
If you’re trading large volumes or using high-frequency strategies, ECN brokers are ideal. They provide tighter spreads and faster execution.
But if you want simplicity and don’t trade news, a market maker with fixed spreads might suit you better.
Remember, both types can work well if you choose a regulated and reputable broker.
Fixed vs Variable Spreads: Which Should You Choose?
Let’s compare fixed vs variable spreads side-by-side:
| Factor | Fixed Spreads | Variable Spreads |
|---|---|---|
| Cost Stability | Always consistent | Changes with volatility |
| Spread Size | Usually wider | Usually tighter |
| News Event Behavior | Remains the same | Can widen drastically |
| Broker Type | Market makers | ECN/STP brokers |
| Best For | Beginners, low-vol traders | Advanced, high-freq traders |
| Risk of Requotes | High | Low |
Ask Yourself:
- Do you trade during news?
- Are you sensitive to cost changes?
- Do you use EAs or automated systems?
If you answered yes to the above, fixed spreads are safer. Otherwise, variable spreads may save you money in calm markets.
Real-World Trading Example
Let’s say you trade the USD/JPY pair.
With a fixed spread broker:
- Spread: 2 pips
- Lot size: 1 standard lot (100,000 units)
- Cost: $20 per trade (since each pip = $10)
With a variable spread broker:
- Normal spread: 0.6 pips → $6 cost
- During news: 5 pips → $50 cost
Clearly, timing your trades matters. If you’re aware of the bid-ask spread in forex and market behavior, you can make smarter decisions.
How to Manage Spreads in Your Trading Strategy
You can reduce the impact of spreads with a few simple tactics:
- Trade during major market sessions (London, New York) for tighter spreads
- Avoid trading during news events if you use variable spreads
- Choose currency pairs with high liquidity like EUR/USD and USD/JPY
- Use limit orders instead of market orders to control entry points
- Compare ECN vs market maker brokers before choosing one
Also, always test your broker’s spreads on a demo account first.
Final Thoughts on Forex Spreads
Forex spreads are not just a technical detail—they’re a core trading cost that affects every decision. Choosing between fixed vs variable spreads depends on your trading goals, experience, and risk tolerance.
Traders who value consistency and trade during stable markets may prefer fixed spreads. On the other hand, those who trade during volatile hours and can handle sudden cost shifts will benefit more from variable spreads.
Also, always consider the broker’s model. ECN vs market maker brokers offer very different trading environments. Know the difference, test their platforms, and choose one that aligns with your strategy.
Never underestimate the bid-ask spread in forex. It may seem small, but its impact is big. Whether you’re scalping, day trading, or holding long-term, understanding spreads helps you trade smarter.
Now that you know how forex spreads work, you’re better equipped to make cost-efficient trades. Choose wisely, stay consistent, and always watch that spread before hitting “Buy” or “Sell.”
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This post is originally published on EDGE-FOREX.
