Understanding spreads is one of the most important steps in evaluating the true cost of forex trading. This guide explains what spreads are, how they work and what UK traders should consider when comparing brokers.
What Is a Forex Spread?
A forex spread is the difference between the bid price and the ask price. Every time you open a trade, you enter at a slight disadvantage because the ask price is always higher than the bid price.
For example, if the EUR/USD pair is quoted at 1.0850 / 1.0852, the spread is 2 pips. This represents the cost of that trade before any commissions.
How Spreads Are Measured (Pips Explained)
Spreads are measured in pips. A pip is the smallest standard unit of price movement for most currency pairs. For pairs quoted to four decimal places, one pip equals 0.0001. For yen pairs, one pip equals 0.01.
Fixed vs Variable Spreads
Fixed Spreads
Fixed spreads remain constant regardless of market conditions. They provide predictable trading costs but are typically wider than the tightest variable spreads.
Variable Spreads
Variable spreads fluctuate based on market liquidity and volatility. During peak trading hours they can be very tight. During periods of low liquidity or around major economic announcements, they can widen significantly.
How Brokers Make Money From Spreads
Spread markup model: The broker adds a small markup to the raw interbank spread. The trader pays no separate commission.
Raw spread plus commission model: The broker passes through the raw interbank spread with little or no markup and charges a fixed commission per lot traded. Use our calculate your position size given your stop and account size tool to factor spread costs into your trade planning. For a side-by-side example, see our raw-spread account comparison.
Why Low Spreads Don't Always Mean Lower Costs
- Commissions: Raw spread accounts almost always carry a per-lot commission.
- Average vs minimum spreads: Minimum spreads are achieved only under ideal conditions.
- Slippage: In fast-moving markets, the execution price may differ from the quoted price.
- Execution quality: Speed and reliability of order execution affect actual costs.
Typical Spreads on Major Currency Pairs
EUR/USD: 0.6 - 1.5 pips. GBP/USD: 0.9 - 2.0 pips. USD/JPY: 0.7 - 1.5 pips. EUR/GBP: 1.0 - 2.5 pips. AUD/USD: 0.8 - 1.8 pips. These ranges are indicative and will vary depending on market conditions and broker.
How to Compare Spreads Between FCA Regulated Brokers
- Check whether the broker offers fixed or variable spreads.
- Compare average spreads rather than minimum spreads.
- Factor in any commissions charged on top of raw spreads.
- Review overnight financing charges.
- Consider platform quality and execution speed alongside pricing.
See our reviews for IG, CMC Markets and Pepperstone, or browse our full best forex brokers comparison. For a head-to-head comparison of two long-established FCA brokers, start with IG vs CMC Markets.
Final Considerations Before Choosing a Broker
Spreads are an important factor, but they should not be the only consideration. Regulation, platform reliability, available markets, customer support and transparency of fee disclosures all play a role. For UK traders, choosing an FCA regulated broker provides negative balance protection and access to the FSCS.
Want recommendations? See the best forex brokers for UK beginners with spread-only pricing.
Forex Spread FAQs
What is a good spread for forex trading?
For major currency pairs, typical spreads from FCA regulated brokers range from around 0.1 to 1.5 pips depending on the account type and market conditions.
Are fixed or variable spreads better?
Neither is inherently better. Fixed spreads offer predictable costs. Variable spreads can be lower during calm conditions but may widen during news events.
Do all brokers charge spreads?
Most forex brokers incorporate a spread. Some offer raw spread accounts with a separate commission. Compare total cost rather than spreads alone.
Why do spreads widen during news events?
Spreads widen because liquidity providers adjust pricing to reflect increased uncertainty, with fewer participants willing to trade at narrow prices.
Risk Warning: Spread betting and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 70-80% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.