Explaining Bid-Ask Spreads in Forex Trading – Know about calculations and influencing factors

Understanding Bid-Ask Spreads in Forex Trading


In forex trading, people buy and sell currencies in the global market. When trading, they come across something called bid-ask spreads. Understanding bid-ask spreads is important because it affects how much money traders make and how trades are done. This article will explain what bid-ask spreads are, how they are calculated, and what influences them.

Bid-Ask Spread Defined

A bid-ask spread is the difference between two prices when buying or selling a currency. The bid price is the highest price a buyer is willing to pay, and the ask price is the lowest price a seller is willing to sell for. The difference between these two prices is the bid-ask spread. This spread is how market makers make money and cover their costs.

Calculation of Bid-Ask Spreads

To calculate the bid-ask spread, you subtract the bid price from the ask price. For example, if the bid price for EUR/USD is 1.2000 and the ask price is 1.2003, the spread would be 0.0003 or 3 pips. Pips are a way to measure price movements in forex trading. In this case, the spread is 3 pips or 0.0003 USD.

Most trading platforms show bid and ask prices in real-time, so traders can see the spread right away. It’s important to know that spreads can be different for different currency pairs and trading platforms. Generally, major currency pairs like EUR/USD have smaller spreads compared to less commonly traded currency pairs.

Factors Influencing Bid-Ask Spreads

Several factors can affect bid-ask spreads in forex trading. Understanding these factors can help traders predict possible spread changes and make better trading choices. Here are some key factors:

1. Market Liquidity: Liquidity means how easy it is to buy or sell something without changing its price a lot. Currencies that are traded a lot have smaller spreads because there are more buyers and sellers. Currencies that are traded less often have bigger spreads because it’s harder to find someone to trade with.

2. Economic News and Events: Important news or events can make the forex market change a lot, leading to bigger spreads. During these times, traders might ask for bigger spreads because there is more risk and uncertainty.

3. Trading Sessions: Bid-ask spreads can be different during different times of the day. When different financial centers around the world are open or closed, trading activity and liquidity change. Major currency pairs usually have smaller spreads when big financial centers like London, New York, and Tokyo are open at the same time.

4. Market Maker Policies: Market makers, like banks and brokers, create a market for currency pairs by buying and selling them. These market makers decide on their own bid-ask spreads based on things like how much risk they want to take and how much money they want to make. So, spreads can be different depending on the market maker, and traders need to compare them.

How Bid-Ask Spreads Impact Traders

Bid-ask spreads affect traders in terms of costs and how trades are done. Here’s how they affect forex traders:

1. Transaction Costs: Bid-ask spreads are the costs traders pay when they trade forex. When making a trade, traders need to make up for the spread before they can make a profit. Traders need to think about the size of the spread when they start and end a trade because it affects how much money they make.

2. Slippage: Slippage happens when a trade is done at a different price than expected. Wider spreads make it more likely for slippage to happen, especially when the market is changing quickly and trades take longer to happen. Traders need to be careful about spreads, especially when they are buying or selling right away.

3. Scalping and Day Trading: Some traders want to make money from small price changes, so they buy and sell quickly. These traders care a lot about spreads because they want to make small profits. Smaller spreads make it easier for short-term traders to make money.

4. Long-Term Trading: Some traders want to hold on to their trades for a long time. For them, spreads might not matter as much. But they still need to know about spreads so they don’t pay too much for a currency pair.


Q1: Can bid-ask spreads be zero?

No, bid-ask spreads can’t be zero in normal market conditions. The spread is how market makers make money and cover their costs. But, sometimes spreads can be really small, almost zero, when the market is changing a lot.

Q2: Do all forex brokers have the same spreads?

No, forex brokers can have different spreads. Market makers decide on their own spreads based on things like risk, money costs, and competition. Different brokers might have different spreads. Some spreads can change, and some might stay the same.

Q3: How can traders find the best bid-ask spreads?

Traders can compare the spreads of different forex brokers to find the best ones. They should look at things like how reliable and good the broker is, who the broker works with, and if there are any extra costs. Traders can also try using demo accounts to see what spreads different brokers have.


1. [Investopedia – Bid-Ask Spread](https://www.investopedia.com/terms/b/bid-askspread.asp)
2. [FXCM – Understanding Bid Ask Spreads](https://www.fxcm.com/uk/insights/understanding-bid-ask-spreads/)
3. [DailyFX – Forex Market Liquidity](https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2018/03/21/forex-market-liquidity-forex-trading.html)
4. [BabyPips – Dealing with Market Spreads](https://www.babypips.com/learn/forex/dealing-with-market-spreads)

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