## Understanding the Forex Spread: Complete Guide for Traders

### Why do brokers charge spread?

When you place a currency order with a broker, two prices are displayed simultaneously: one to buy and another to sell. This difference is the spread, and it is basically the margin that the broker profits from each transaction. Instead of charging an explicit commission, brokers make money from this price difference.

The logic is simple: the broker buys currency at a (buying price) and sells currency at a higher (selling price). This "gap" between the two prices is exactly where the spread resides. For high-frequency traders, monitoring this invisible cost is essential.

### Identifying the two prices: ASK and BID

In the forex world, there are two simultaneous prices:

**ASK Price (Buy Price):** This is how much you will pay to buy the base currency. If you want to buy euros with dollars, the ASK is the price the broker will ask.

**BID Price (Sell Price):** This is how much you receive when selling the base currency. When selling euros, the BID is the amount the broker will offer.

Whenever you enter a position, you pay the higher (ASK) price. When you exit, you receive the lower (BID) price. The gap between these two values is precisely the spread you are paying for the convenience of the transaction.

### How the spread is calculated in practice

On most platforms, the spread is already embedded in the quote. Your task is simply to subtract the selling price from the buying price. In currency pairs with 5 decimal places, the difference is usually expressed in pips (percentage points in movement).

For example, if EUR/USD is quoted at 1.04103 (BID) and 1.04111 (ASK), the spread is 8 pips or 0.8 points. When you trade a mini lot (10,000 units), this 0.8 pip spread costs exactly $0.80. Trading 5 mini lots, the cost rises to $4.00.

### The two spread models: which is more advantageous?

There are two main types of spreads you will encounter depending on the broker:

**Fixed Spread**

With fixed spreads, you know exactly how much you will pay in costs regardless of the time or market conditions. The broker acts as a market maker, buying large positions from liquidity providers and passing them on to clients. This gives the broker full control over the displayed prices.

Pros: predictable cost, lower capital requirements. Cons: during extreme volatility, the broker may reject your order (re-quote) or the executed price may be completely different from what you expected (slippage).

**Variable Spread**

Variable spreads change constantly, following the actual supply and demand of the market. Brokers offering this model do not act as counterparties—they simply pass on prices from multiple liquidity providers without dealing desk intervention.

Pros: fewer re-quotes, greater transparency. Cons: spreads widen during economic news or holidays when liquidity decreases. For scalpers, this is particularly harmful, as wide spreads quickly erode gains.

### Calculating your actual transaction cost

To determine the exact financial impact of the spread, you need two pieces of information:

1. **Value per pip** — varies according to position size
2. **Trade volume** — how many lots you are opening

The formula is: Spread (in pips) × Value per pip × Number of lots = Total cost

If the spread is 0.8 pips and you open 1 mini lot with a $1 per pip value: 0.8 × 1 × $1 = $0.80 cost. Increasing to 5 mini lots multiplies the cost by 5, reaching $4.00.

### Which model to choose?

Choosing between fixed and variable spreads depends on your trading style. Scalpers need tight spreads and predictability, making fixed spreads more attractive despite slippage risk. Long-term traders can tolerate variable spreads if transparency and the absence of re-quotes compensate for occasional volatility in costs. The important thing is to understand that this spread is not an optional fee—it is always the inherent cost of trading in the forex market.