When you trade in forex you are buying one currency and selling another.
Every trade has a bit of a hidden cost called the spread – it is the difference between the price at which you can buy and the price you can sell.
Traders measure this cost in something called pips (price interest point). It is the smallest standard price move in most of our currency pairs and usually works out at 0.0001.
A spread can either be fixed or variable.
What is a Spread in Forex?
A forex spread is simply the difference between two prices given for a currency pair.
- Bid price: the price at which you can sell the base currency.
- Ask price: the price at which you can buy the base currency.
The ask price is always a little higher than the bid price.
That gap is the bid-ask spread.Formula: Spread = Ask price − Bid price
Example (EUR/USD):
- Bid price: 1.1000
- Ask price: 1.1002
- Spread: 1.1002 − 1.1000 = 0.0002, which is 2 pips
If you buy at 1.1002 and close right away at 1.1000, you lose 2 pips. That is why the spread is a trading cost.
The price must move in your favour by the spread amount before you break even.
What is a Fixed Spread?
A fixed spread is a spread that stays the same, no matter what is going on in the market. Generally, providers set it in advance.
If a pair has a fixed spread of 2 pips, you will be paying about 2 pips on every trade, whether the market is quiet or crazy.
Example:
A fixed spread of 2 pips on EUR/USD will stay at 2 pips whether its morning, or midday or during the busy hours.
Advantages:
- You can predict your costs before you even trade.
- Its easy to get your head round and plan for.
- Costs stay stable in calm markets.
Limitations:
- Fixed spreads are often wider than variable spreads in calm markets.
- During very fast markets, orders may be delayed or filled at a different price than expected.
- They may not suit traders who want the lowest possible cost when markets are quiet.
What is a Variable Spread?
A variable spread is a spread that changes all the time based on what’s going on in the market.
It can shrink or get bigger, all in the space of seconds. Main drivers are:
- Liquidity:
How many traders are actually buying and selling. When its high, the spreads get tighter.
- Market volatility:
How fast and how much the price is moving around. When its high, the spreads get wider.
- Market conditions:
What time of day it is, what news has come out and the currency pair itself.
Example:
A variable spread on EUR/USD might be 1 pip in a quiet, busy session and 4 pips right after a big news release.
Advantages:
- Spreads can be extremely low when the market is busy.
- The prices you get reflect what is actually going on in the market.
- It can cost less overall during quiet, active sessions.
Limitations:
- Your costs can be tough to pin down – all too often they catch you off guard.
- Spreads can go from being tight one minute to suddenly blowing out wide when some piece of news drops or the market suddenly lurches in a certain direction.
- Beginners might find it downright bewildering when the costs start changing – at first, that is.
Fixed vs Variable Spreads: Key Differences
The main difference really is that a fixed spread stays put, never changing, while a variable spread on the other hand can change with the market.
Depending on how much business is going through, just how choppy the market is, and what news is hitting the wires.
| Feature | Fixed Spread | Variable Spread |
| Meaning | Stays the same at all times | Changes with live market conditions |
| Cost predictability | High. You know the cost in advance | Lower. The cost can change from trade to trade |
| Behavior during volatility | Usually stays the same, though order execution can be affected | Often widens when prices move fast |
| Suitability for beginners | Easier to understand and plan around | Needs more attention to changing costs |
| Typical trading conditions | Often offered for steady, predictable costing | Closely follows liquidity and market activity |
Which Spread is Better for Beginners?
Its not a one size fits all situation – the right choice is all about you and your trading style. Put it this way:
- Trading style:
Those who trade a lot over short periods may care more about keeping the costs down to a minimum.
On the other hand, people who don’t trade all that often might value being able to rely on a steady, predictable cost.
- Market conditions:
Variable spreads can be tight in calm, liquid markets but wide during news.
Fixed spreads give stable costs but may be higher in calm periods.
- Cost preference:
Some people prefer certainty. Others accept some uncertainty for a chance at lower costs.
Many newcomers can find fixed spreads easier to wrap their heads around because they don’t change.
Variable spreads can teach you a thing or two about how things like liquidity and volatility play into the price of things.
The key thing is to know which type you are dealing with before you make a move.
Quick Example
Suppose you trade EUR/USD and compare two setups:
- Fixed spread: 2 pips all day.
- Variable spread: between 1 pip and 4 pips.
| Market situation | Fixed spread | Variable spread |
| Calm, busy session | 2 pips | 1 pip |
| Normal conditions | 2 pips | 2 pips |
| Major news release | 2 pips | 4 pips |
In the calm session, the variable spread costs less. During the news release, it costs more.
The fixed spread stays at 2 pips throughout.
This is an illustration with round numbers, not a guarantee of how any provider prices trades.
