Forex CFD Spreads

In forex trading, every currency pair has two prices: the bid and the ask.

The euro (EUR) is the base currency, and the US dollar (USD) is the quote currency (or term currency).

The spread is the difference between the bid and ask prices.

A pip stands for ‘percentage in point’ and is usually the smallest whole price movement a currency pair can make. For most currency pairs, 1 pip = 0.0001 (the fourth decimal place).

The current bid and ask prices are the price levels that traders can engage (trade) with the market immediately or ‘on the spot’. The ask price will always usually be slightly higher than the underlying market price, whereas the bid price is slightly below the underlying market price.

Spreads can be influenced by a variety of factors. High market volatility can impact spreads, making them wider as brokers seek to reduce their risk during times of uncertainty; low liquidity in the market can also weigh on spreads, making trades more expensive.

Spreads can affect trading profitability as they may widen significantly during volatile market conditions, causing slippage (trades get executed at a price different from the requested fill price). Another factor that should be taken into consideration is market conditions in relation to geopolitical developments. Important news updates can play a role in shaping market momentum with spreads following suit.

Traders may encounter two types of spreads when executing their trades: fixed and variable.

Fixed spreads remain the same, no matter the market conditions. Fixed spreads allow traders to calculate their trading costs without worrying about any spread changes.

On the contrary, variable (or floating) spreads keep changing based on the supply and demand of financial instruments and the overall market volatility. Variable spreads may be lower than fixed spreads during high-liquidity trading sessions, but their volatile nature should be taken into consideration when developing trading plans.

FP Markets provides an array of fixed and variable spreads for fast trade execution. Partnering with market-leading financial institutions, FP Markets traders enjoy deep liquidity pools and real-time price quotes for various popular financial instruments. Open a Standard or a Raw trading account and build your trading plan, making use of spreads as low as 0.0 pips.

Spread in Forex is calculated by taking the difference between the current bid and ask prices of a currency pair.

Spread = Ask Price − Bid Price

For instance, the EUR/AUD currency pair is quoted as AU$1.6162/AU$1.6163. Simply subtract the ask price (AU$1.6163) from the bid price ($AU1.6162) to determine the spread: 0.0001.

Knowing the forex spread of a specific currency pair provides traders with insights into the market’s volatility and liquidity. As a result, forex spreads can serve as indicators of overall market conditions.

Short-term trading strategies such as scalping and day trading are more likely to be affected by widening spreads. Wider spreads lead to increased trading costs, reducing the potential for profitable trades.

Long-term trading strategies, like swing or position trading, are less likely to be impacted by wider spreads.