Understanding Forex spreads in trading

When you first venture into forex trading, you'll quickly encounter the term 'spread'. It's a fundamental concept that directly affects your trading costs and potential profits, so let's break it down.

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What are Forex spreads?

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The spread is the difference between two prices: 

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• The bid (the price at which you can sell a currency pair) 
• The ask (the price at which you can buy a currency pair) 

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For example, if you see EUR/USD quoted as 1.0850/1.0852, the spread is 0.0002, or 2 pips.

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Every time you open a position, you're already starting slightly at a loss equal to the spread. Think of it like buying and selling foreign currency at an airport - there's always a difference between the buying and selling rates.

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Types of Forex spreads

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Fixed spreads

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• Remain constant regardless of market conditions
• More predictable trading costs
• Usually wider than variable spreads or come with an added commission fee

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Variable spreads

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• Change based on market conditions
• Generally tighter during normal market hours
• Can widen significantly during major news events
• More common with larger brokers

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MT5 account types and their Forex spreads

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At Deriv, account types are tailored to suit different trading styles and preferences, especially regarding spreads. Here's a brief overview comparing account types:

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Standard account

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• Access to all available assets (Financial, Tactical, and Derived Indices)
• Variable forex spreads balanced for general trading
• Suitable for traders who want access to a full range of markets

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Financial account

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• Focuses exclusively on financial instruments
• Tighter financial variable spreads compared to Standard accounts
• Ideal for traders focusing purely on financial markets

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Swap-Free account

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• Designed for traders who prefer not to pay overnight fees (swaps)
• Slightly wider spreads than standard accounts to compensate for no swap charges
• Perfect for longer-term positions or those who prefer not to deal with swap calculations

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Zero spread account

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• No spread costs but includes commission charges
• Spreads from 0.0 pips + commission per lot
• Best suited for high-volume traders who prefer transparent cost structures

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What affects Forex spreads?

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Several factors influence the width of spreads:

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Market hours

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• Tightest spreads: When major markets overlap (London/New York sessions)
• Widest spreads: During the Asian session and market closing hours

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Currency pairs

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• Major pairs (EUR/USD, GBP/USD): Typically tightest spreads
• Minor pairs (EUR/GBP, AUD/NZD): Moderately wider spreads
• Exotic pairs (USD/TRY, EUR/ZAR): Widest spreads due to lower liquidity

Market events

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Spreads tend to widen during:

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• Economic data releases
• Central bank announcements
• Political events
• Natural disasters or global crises

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What is slippage in trading?

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Slippage occurs when you receive a different price from what you expected when your order executes. It's particularly common during volatile market conditions or when trading larger positions.

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How to minimise slippage:

• Trade during main market hours when liquidity is highest
• Use limit orders instead of market orders where possible
• Avoid trading immediately before and after major market news releases
• Consider your position size relative to market liquidity
• Trade major currency pairs which typically have better liquidity

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Practical trading guidelines

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When choosing an account type or planning your trades, consider:

• Your trading style (day trading, swing trading, scalping)
• Average position size
• Preferred currency pairs
• Trading hours
• Risk tolerance
• Whether you prefer predictable costs (fixed spreads) or potentially lower but variable costs

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Learn more about forex spreads with our free courses on Deriv Academy or open a free demo trading account with Deriv to explore different account types, see how spreads impact your trades, and find the best fit for your strategy.

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Log in to Deriv Academy using your Deriv account email and password to get started.