COST OF TRADING
Forex Spread: Definition, Calculation, Types & Why It Matters Description
Understand the bid-ask spread, how to calculate it in pips/points, fixed vs variable and ECN accounts, what widens/tightens spreads, how to view it on MT5, and when spread size really impacts your strategy.
Spread
Bid–Ask
Department
OTM Academy
Category
Fundamental Analysis
What Is the Spread?
The spread is the difference between the Ask (buy) and Bid (sell) price of a tradable instrument over a given moment. Brokers earn part of their revenue from this difference (plus any commissions). Spreads can be fixed or variable; variable spreads change with market conditions and liquidity.
How to Calculate the Spread
In FX, the spread is usually measured in pips.
Example: EURUSD 1.1234 / 1.1235 → spread = 0.0001 = 1 pip.
JPY pairs quote to 2 decimals (e.g., USDJPY 150.10 / 150.12 → 0.02 = 2 pips).
Fixed, Variable & ECN Accounts
Fixed: stable in normal conditions but can still widen during high volatility.
Variable: tight in liquid hours; widen on news/low liquidity.
ECN/RAW: you see near-bank spreads (often 0.1–0.2 pip on EURUSD) plus a per-lot commission.
Practical Cost Examples
FX lots: 1 standard lot = 100,000 units of the base currency; 1 pip ≈ $10 on most USD-quoted majors.
If EURUSD spread = 0.6 pip and you trade 1 lot, cost ≈ $6.
Trade 10 lots → cost ≈ $60.
Indices (CFDs): example CAC40/DAX30 spread 0.8 point; with €10/point per lot, cost = €8 per lot.
Note: contract sizes & tick values vary by broker—always check “Contract Specs”.
How to Display Spread on MT5
Open Market Watch → right-click → Spread (adds a live spread column).
On a chart: right-click → Properties → Common → Show Ask line. The gap between Bid and Ask is the spread.
Why Spread Size Matters & Tips
Short-term/day trading/scalping: spread is a big part of your P&L. Avoid entries when spreads spike (news, illiquid hours).
Swing/position trading: spread is less critical relative to larger targets, but still part of cost control.
Add a spread filter to systems that take many small trades; only trigger when spread ≤ typical levels.
Combine with a basic trend filter (e.g., SMA 25 vs SMA 100) and test on a demo before going live.
