Understanding spreads in Forex: What you need to know

4
min read

Understanding spreads in Forex: What you need to know

4
min read
Red and blue price tags labeled BID and ASK, representing the concept of spreads in Forex trading.
Lesson
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If you're stepping into forex trading, you’ll hear the term ‘spread’ a lot. But don’t worry-it’s not as complicated as it sounds! Think of spreads as the small but important price gap that affects your trading costs and profits. Let’s break it down in a way that makes sense.


What are Forex spreads?

A forex spread is simply the difference between two prices:

  • Bid price – The price at which you can sell a currency pair.
  • Ask price – The price at which you can buy a currency pair.

Example: If EUR/USD is quoted at 1.0850/1.0852, the spread is 0.0002 or 2 pips. That means you need the price to move at least 2 pips in your favor before you break even. It’s like when you exchange currency at an airport—the buying price is always slightly worse than the selling price.


Types of Forex spreads

Spread Type Description
Fixed Spreads Stay the same regardless of market conditions. More predictable costs, great for beginners. Usually wider than variable spreads or come with extra commission fees.
Variable Spreads Fluctuate depending on market activity. Tighter during active trading hours but can widen in volatile conditions. More common with larger brokers.

Forex spreads on Deriv accounts

At Deriv, different account types come with different spread structures. Here’s a quick breakdown:

Account Type Features
Standard Account Balanced variable spreads, great for general trading.
Financial Account Focuses on financial instruments with tighter spreads.
Swap-Free Account No overnight swap fees but slightly wider spreads.
Zero Spread Account No spread costs but includes a commission per lot traded.

What affects Forex spreads?

Spreads aren’t set in stone-they change based on a few key factors:

Factor Impact on Spreads
Market Hours Spreads are tightest when major trading sessions (London/New York) overlap and widen during quieter times (like the Asian session).
Currency Pairs Major pairs (EUR/USD, GBP/USD) have lower spreads, while exotic pairs (USD/TRY, EUR/ZAR) tend to have higher spreads.
Market Events News releases, central bank announcements, and political events can cause spreads to widen dramatically.

What is slippage?

Slippage happens when your order gets executed at a different price than expected, usually due to market volatility.

How to minimize slippage:

  • Trade during peak hours for better liquidity.
  • Use limit orders instead of market orders.
  • Avoid trading right before or after major news events.
  • Stick to major currency pairs with high liquidity.


Practical trading tips

When choosing an account or planning trades, consider:

  • Your trading style (scalping, day trading, swing trading).
  • Preferred currency pairs.
  • Trading hours.
  • Risk tolerance.
  • Whether you prefer fixed or variable spreads.

Want to test how spreads affect your trades? Open a free Deriv demo account and practice risk-free.

Log in to Deriv Academy using your Deriv account email and password to start learning today.

Quiz

If you’re trading during a major market announcement, what might happen to spreads?

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They’ll stay the same.
?
They’ll widen.
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They’ll disappear completely.
?

FAQs

What’s a good spread for forex trading?

Lower spreads (like 1-3 pips on major pairs) are generally better because they reduce your trading costs.

Why do spreads widen at night?

There’s less trading activity during off-peak hours, meaning less liquidity and wider spreads.

Is a zero spread account really free?

Not exactly! Zero spread accounts charge a commission per lot instead of a spread.