Forex course · Section 1: Forex Basics: How the Currency Market Works
Bid, Ask and Spread: What a Forex Trade Really Costs
The bid is the price you sell at, the ask the price you buy at, and the gap between them, the spread, is your first cost on every forex trade.
Beginner5 min read·6:16 video·Lesson 3 of 26·quiz: 4 questions
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The bid is the price at which you can sell a currency pair, the ask (or offer) is the price at which you can buy it, and the spread is the difference between the two. Because you buy at the higher price and sell at the lower one, every forex trade starts with a small loss equal to the spread. Knowing your spread, commission and swap tells you exactly how far the market must move before a trade makes money.
Two prices, not one
A forex quote always has two sides:
| EUR/USD | |
|---|---|
| Bid (you sell here) | 1.10000 |
| Ask (you buy here) | 1.10012 |
| Spread | 0.00012 = 1.2 pips |
The dealer or liquidity provider buys from you at the bid and sells to you at the ask. The gap pays them for taking the other side of your trade. Most brokers quote to five decimals for most pairs (three for yen pairs). The last digit is a fraction of a pip called a pipette; What Is a Pip? explains this in full.
Example
You buy 1 standard lot (100,000 euros) of EUR/USD at the ask of 1.10012. At that moment you could only sell at the bid of 1.10000. Your position shows a loss of 0.00012 × 100,000 = 12 US dollars, even though the market has not moved. The bid has to rise to 1.10012 for you to break even.
Which price does the chart show?
Most trading platforms draw charts from the bid. That has three effects:
- A buy order fills at the ask, which is above the line you see on the chart.
- A sell order, and the stop-loss on a long position, uses the bid, which is the line on the chart.
- The stop-loss on a short position closes it with a buy, which uses the ask, above the chart line. A short's stop can be hit when the chart looks a little below it.
This is why traders add the spread to stops and limit orders on the ask side. If your sell is stopped out "early" on a quiet evening, check how wide the spread was at that moment.
What decides the size of the spread?
- Liquidity: EUR/USD, USD/JPY and GBP/USD usually have the tightest spreads. Crosses cost more; exotics much more.
- Time of day: spreads are tightest when the London and New York sessions overlap and widest in the quiet hour around the daily rollover at 17:00 New York time (about 02:00 or 03:00 in Pakistan, depending on US daylight saving). See Forex Market Hours.
- News: before and right after big releases such as US jobs data or central bank decisions, liquidity providers pull their quotes and spreads can jump to many times normal for a few seconds or minutes.
- Account type: "standard" accounts often build the broker's fee into a wider spread; "raw" or "ECN" accounts show a tight spread and charge a separate commission.
- Market stress: in a crisis, spreads on everything widen.
Risk
A spread that is 1 pip at midday can be 5, 10 or more pips at the rollover or during a surprise announcement. A tight stop placed just a few pips away can be hit by the spread alone. Avoid holding small-stop positions through rollover and major news.
Fixed vs variable spreads
Some brokers advertise fixed spreads that do not change. They are usually wider on average, and the broker may still reject or requote orders in fast markets. Variable (floating) spreads follow the market: tighter most of the time, wider when liquidity is thin. Neither is free; the question is which costs you less for the hours and pairs you trade.
The full cost of a trade
The spread is only the first cost. A complete picture is:
Total cost = spread + commission + swap (if held overnight) + slippage
- Commission: on raw-spread accounts, typically a fixed amount per lot traded, charged when you open and close (the "round turn").
- Swap: the overnight interest charge or credit, covered in Swaps, Rollover and the Carry Trade.
- Slippage: the difference between the price you expected and the price you got, mostly during fast moves.
Example
Compare two accounts trading 1 standard lot of EUR/USD (10 US dollars per pip):
- Standard account: 1.4-pip spread, no commission → 1.4 × 10 = 14 dollars per round turn.
- Raw account: 0.2-pip spread + 7 dollars commission per round turn → 0.2 × 10 + 7 = 9 dollars.
On 20 lots a month, that is 280 dollars versus 180 dollars. These numbers are illustrations; check your broker's own price list.
How costs eat small targets
The spread matters more the shorter your trades are. Compare the spread with your target and stop:
| Style | Typical target | 1.2-pip spread as share of target |
|---|---|---|
| Scalping | 5 pips | 24% |
| Day trading | 30 pips | 4% |
| Swing trading | 150 pips | 0.8% |
A scalper paying 1.2 pips to chase 5 pips gives away almost a quarter of every winning trade before anything else goes wrong. This is one reason high-frequency retail trading is so hard to make profitable, a theme we come back to in Why Most Forex Traders Lose Money.
Tip
Keep a note of the actual spread at the time you usually trade, not the "from 0.0 pips" figure in an advert. Look at it at your trading hour for a week. Use the real figure in your position sizing and backtests.
Spreads and testing
When you test a strategy on historical data, you must subtract a realistic spread from every trade, and a wider one for news hours and rollover. A strategy that earns 2 pips per trade before costs can easily lose money after a 1.5-pip spread and a commission. We cover this in How to Backtest a Forex Strategy, and you can see how costs are charged in the DanioX forex backtests.
Key takeaways
- You buy at the ask (higher) and sell at the bid (lower); the difference is the spread.
- Every trade starts at a small loss equal to the spread, so you must earn it back before you make money.
- Total cost = spread + commission + swap; compare brokers on all three, not on the headline spread.
- Spreads widen at the daily rollover, around big news and in quiet hours, which can trigger stops and fill orders at worse prices.
Quiz: check what you learned
0/4 answeredAnswer every question to finish the lesson. Wrong answers are fine: read the explanation and try again.
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