What Is the Spread?
Imagine that you go to an exchange office to convert 1,000 US dollars into Egyptian pounds. You ask the employee about the dollar rate, and he tells you it is 18.70. Then you go to another exchange office and find the rate is 18.60. You would notice the difference between the two prices, and this difference is actually the commission that the exchange office earns in return for its service.
Using the same concept, in the forex market there is something called the spread, which is the commission deducted when executing trades.
So, what is the spread? How does the spread work in trading?
When you open a buy trade, for example on the EUR/USD pair, at that moment you are buying the euro and selling the dollar. But have you ever asked yourself who is on the other side selling you the euro?
The answer is that there are other traders and companies that already have sell orders available. Once you execute the buy trade, a commission called the spread is deducted. It is simply the difference between the buying price and the selling price available at the same moment.
For this reason, the EUR/USD pair is considered one of the lowest pairs in terms of spread, because it is the most traded pair globally, accounting for more than 60% of the daily market volume. This means there is huge liquidity and a very large number of contracts, which results in a very small difference between the buy and sell prices.
Why does the broker charge the spread?
The spread is the commission that the broker or trading company charges in return for providing instant trade execution across different currency pairs, commodities, and indices.
Is the spread fixed or variable?
The value of the spread can vary depending on several factors:
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Liquidity volume. When trading volumes are high, the spread decreases because contracts are abundant and close to each other.
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Trading sessions. During major sessions such as London and New York, the spread is low, while after 10 p.m., during periods of low liquidity, it usually increases.
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Cross pairs. Less frequently traded currencies usually have higher spreads due to weaker liquidity compared to major pairs.
In other words, the higher the liquidity, the lower the spread, and the lower the liquidity, the higher your trading cost becomes.
A Practical Example of Spread Cost
Assume you enter a buy trade with a standard lot size, which equals 100,000 units, where each pip is worth 10 dollars, and the spread is 3 pips.
The cost here = 3 × 10 = 30 dollars, which is the commission you pay immediately upon opening the trade.
The spread is the difference between the buy price and the sell price. It represents the broker’s commission and varies depending on liquidity volume, trading time, and the type of pair. The lower the spread, the lower the trading cost
