Spread and Commission

What is the Spread

The spread is the difference between the bid price (the price at which you can sell) and the ask price (the price at which you can buy) of a currency pair. It is measured in pips and represents the most fundamental cost of trading forex. Every time you open a trade, you effectively pay the spread as a transaction fee.

For example, if EUR/USD is quoted at 1.0848 / 1.0850, the spread is 2 pips (1.0850 − 1.0848 = 0.0002). If you buy at 1.0850 and immediately sell, you would sell at 1.0848, incurring a 2-pip loss. This means the market must move at least 2 pips in your favor before your trade becomes profitable.

The spread exists because brokers and liquidity providers need to earn revenue for facilitating your trades. In a spread-only account model, the spread is the broker's primary source of income. Tighter spreads mean lower costs for you, which is why comparing spreads across brokers is an important part of choosing where to trade.

Fixed vs Variable Spreads

Brokers offer two types of spread structures: fixed and variable (also called floating).

Fixed spreads remain constant regardless of market conditions. If your broker advertises a 2-pip fixed spread on EUR/USD, you will pay 2 pips whether the market is calm or volatile. Fixed spreads are offered by Market Maker brokers and provide predictability — you always know your exact transaction cost. The trade-off is that fixed spreads are typically wider than the tightest variable spreads available during normal conditions.

Variable spreads fluctuate based on market conditions. During periods of high liquidity (such as the London-New York overlap), variable spreads on EUR/USD can be as low as 0.1–0.5 pips. However, during low-liquidity periods or major news events, spreads can widen dramatically — sometimes to 5, 10, or even 20+ pips. Variable spreads are typical of ECN/STP brokers and generally offer better pricing on average, but with less predictability.

Factors Affecting Spreads

Several factors influence how wide or narrow spreads are at any given moment:

• Liquidity: Highly liquid pairs like EUR/USD have the tightest spreads. Exotic pairs with less liquidity have much wider spreads.
• Volatility: During major economic releases (Non-Farm Payrolls, interest rate decisions, GDP reports), spreads typically widen as liquidity providers increase their risk premium.
• Time of Day: Spreads are tightest during the London and New York sessions when volume is highest. They widen during the late Asian session and around the daily rollover time (typically 17:00 EST).
• Market Events: Unexpected geopolitical events, natural disasters, or flash crashes can cause spreads to spike as market makers widen their quotes to protect against rapid price movements.

Understanding Commission

Some brokers — particularly ECN/STP brokers — charge a separate commission per trade in addition to (or instead of) the spread. Commission is typically charged as a fixed dollar amount per lot traded, applied when you both open and close the position (round-turn).

A common commission structure is $6–$7 per standard lot round-turn. This means you pay $3–$3.50 when you open the trade and another $3–$3.50 when you close it. In exchange for paying this commission, you receive raw interbank spreads that can be as low as 0.0 pips on major pairs.

Commission-based accounts are generally preferred by active traders and scalpers because the total cost (raw spread + commission) is often lower than the markup embedded in spread-only accounts. For example, a raw spread of 0.2 pips plus a $7 commission (equivalent to 0.7 pips on a standard lot) gives a total cost of 0.9 pips — compared to a typical spread-only account that might charge 1.2–1.5 pips with no commission.

Total Cost of Trading

To accurately compare brokers and account types, you need to calculate the total cost of trading, which includes both the spread and any commission. The formula is:

Total Cost (in pips) = Spread + Commission (converted to pips)

To convert commission to pips, divide the round-turn commission by the pip value for your lot size. For a standard lot on a USD-quoted pair, 1 pip = $10, so a $7 commission equals 0.7 pips.

Comparing Account Types

Let's compare two hypothetical account types for trading EUR/USD:

• Standard Account (spread-only): Average spread of 1.3 pips, no commission. Total cost = 1.3 pips per trade.
• ECN Account (raw spread + commission): Average spread of 0.2 pips, plus $7 round-turn commission (0.7 pips). Total cost = 0.2 + 0.7 = 0.9 pips per trade.

In this example, the ECN account saves you 0.4 pips per trade. That may sound small, but it adds up quickly. If you make 200 trades per month trading 1 standard lot each, the savings amount to 200 × 0.4 × $10 = $800 per month. Over a year, that is $9,600 — a significant difference that directly impacts your bottom line.

Beyond spreads and commissions, also consider swap rates(overnight financing charges) if you hold positions overnight. Swaps can be positive or negative depending on the interest rate differential between the two currencies and your broker's markup. For day traders who close all positions before the daily rollover, swaps are not a factor.

Minimizing Trading Costs

Reducing your trading costs is one of the simplest ways to improve your overall profitability. Here are practical strategies:

• Trade during peak liquidity hours: Focus your trading on the London and New York sessions (08:00–17:00 UTC) when spreads are tightest. Avoid trading during the rollover period or right before major news releases when spreads widen.
• Choose the right account type: If you are an active trader making many trades per day, an ECN account with raw spreads and commission will almost always be cheaper than a spread-only account. For less frequent traders, a spread-only account may be simpler and sufficient.
• Stick to major pairs: Major pairs like EUR/USD, USD/JPY, and GBP/USD consistently offer the tightest spreads. Exotic pairs may look attractive for their volatility, but the wider spreads significantly eat into your profits.
• Use limit orders: Instead of entering at market price, use limit orders to enter at your desired price. This avoids slippage and ensures you get the price you want.
• Consider volume-based discounts: Some brokers offer reduced commissions or tighter spreads for high-volume traders. If you trade significant volume, negotiate with your broker or look for loyalty programs.
• Monitor your costs regularly: Track your total trading costs over time. Many trading platforms provide reports showing your cumulative spread and commission expenses. Use this data to evaluate whether your current broker is competitive.