Understanding Forex Spreads and Commissions

Trading costs can make the difference between a profitable strategy and a losing one. Many traders focus solely on entries and exits, overlooking how spreads and commissions eat into their returns. Understanding these costs is essential for realistic trading expectations and smart broker selection.

This guide explains everything about trading costs—what they are, how they work, and how to minimize their impact on your profits.

What Is a Spread?

Definition

The spread is the difference between the bid price (what buyers will pay) and the ask price (what sellers are asking). It's the most basic cost of trading forex.

Example: EUR/USD Quote: 1.1048 / 1.1050

• Bid (sell price): 1.1048
• Ask (buy price): 1.1050
• Spread: 2 pips

When you buy EUR/USD, you pay 1.1050. To profit, price must rise above 1.1050. The spread is effectively your entry cost.

Why Spreads Exist

Spreads exist because:

• Market makers profit from the difference
• Liquidity providers need compensation
• Brokers need revenue
• It reflects supply/demand dynamics

How Spreads Affect Your Trades

Understanding spread impact:

Entry: When you enter a trade, you're immediately "down" by the spread amount.

Example:

• You buy EUR/USD at 1.1050 (ask)
• Current bid is 1.1048 (what you'd receive if you sold)
• Immediate "loss": 2 pips (the spread)

Exit: When exiting, you sell at the bid (lower) price. The spread affects both entry and exit.

Net Effect: Every round-trip trade costs you one spread. This applies to both market orders and limit orders (though limit orders might get better fills in some cases).

Types of Spreads

Fixed Spreads

The spread remains constant regardless of market conditions.

Characteristics:

• Same spread in quiet and volatile markets
• Published, predictable costs
• Usually wider than average variable spreads
• May widen anyway during extreme conditions

Advantages:

• Easy cost calculation
• No surprises during normal trading
• Good for beginners

Disadvantages:

• Usually more expensive overall
• May widen during news regardless

Variable (Floating) Spreads

The spread changes based on market liquidity and volatility.

Characteristics:

• Tighter during high liquidity (London/NY overlap)
• Wider during low liquidity (Asian session for some pairs)
• Very wide during major news events
• Reflects true market conditions

Advantages:

• Often lower average cost
• Reflects real market liquidity
• Can be very tight in optimal conditions

Disadvantages:

• Unpredictable during news
• May spike suddenly
• Harder to calculate exact costs

Comparing Fixed vs. Variable

Time/Condition	Fixed Spread	Variable Spread
Normal trading	2.0 pips	0.8-1.5 pips
Low liquidity	2.0 pips	2.0-4.0 pips
Major news	2.0-5.0 pips	5.0-20.0 pips
London/NY overlap	2.0 pips	0.5-1.0 pips

For most traders, variable spreads offer better value over time.

What Are Commissions?

Definition

A commission is a fixed fee charged per trade, separate from the spread. It's typically quoted per standard lot ($100,000).

Common Commission Structures:

• $3.50 per lot per side (entry + exit = $7/lot round trip)
• $5.00 per lot per side (entry + exit = $10/lot round trip)
• Per million: $25 per $1,000,000 traded

Commission + Spread Model

Many ECN/STP brokers use this model:

How It Works:

• Very tight spreads (often from 0.0 pips)
• Commission added on top
• Total cost = spread cost + commission

Example:

• EUR/USD spread: 0.2 pips
• Commission: $7 per lot round trip
• 1 lot trade cost: 0.2 pips ($2) + $7 = $9 total

Comparison to Spread-Only: A 1.0 pip spread on 1 lot = $10 cost. So the commission model ($9) is slightly cheaper in this example.

Calculating True Trading Costs

For Spread-Only Accounts

Formula: Cost = Spread (in pips) × Pip Value × Number of Lots

Example:

• EUR/USD, 1.5 pip spread
• Trading 2 standard lots
• Pip value: $10/pip
• Cost: 1.5 × $10 × 2 = $30

For Commission + Spread Accounts

Formula: Cost = (Spread × Pip Value × Lots) + Commission

Example:

• EUR/USD, 0.2 pip spread
• Trading 2 standard lots
• Commission: $3.50 per lot per side
• Spread cost: 0.2 × $10 × 2 = $4
• Commission cost: $3.50 × 2 lots × 2 (entry + exit) = $14
• Total cost: $4 + $14 = $18

Effective Spread Calculation

Convert commission to spread equivalent for easy comparison:

Formula: Effective Spread = Actual Spread + (Commission / Trade Value × 10,000)

Example:

• Spread: 0.2 pips
• Commission: $7 per lot round trip
• 1 lot = $100,000
• Commission as pips: $7 / $100,000 × 10,000 = 0.7 pips
• Effective spread: 0.2 + 0.7 = 0.9 pips

Factors Affecting Trading Costs

Currency Pair

Major Pairs (tightest spreads):

• EUR/USD: 0.5-2.0 pips
• USD/JPY: 0.5-2.0 pips
• GBP/USD: 1.0-2.5 pips

Minor Pairs (medium spreads):

• EUR/GBP: 1.0-3.0 pips
• AUD/JPY: 1.5-3.5 pips

Exotic Pairs (widest spreads):

• USD/ZAR: 50-150 pips
• USD/TRY: 30-100 pips
• EUR/PLN: 20-50 pips

Time of Day

Tightest Spreads:

• London/New York overlap (1-5 PM GMT)
• Peak liquidity hours

Widest Spreads:

• Asian session (for non-Asian pairs)
• End of New York session
• Weekends (market closed)
• Early Sydney session

Market Conditions

Normal Conditions: Spreads at advertised levels.

News Events:

• NFP (Non-Farm Payrolls): Massive spread widening
• Interest rate decisions: Significant widening
• Unexpected political events: Extreme widening

Low Liquidity: Holiday periods, summer months, year-end may see wider spreads.

Broker Type

Market Makers:

• Take the other side of your trades
• Often fixed or wider spreads
• May offer commission-free trading

ECN/STP Brokers:

• Pass orders to liquidity providers
• Variable, often tighter spreads
• Usually charge commissions

Prime Brokers:

• Institutional-level pricing
• Tightest spreads possible
• High minimum deposits

The Impact of Costs on Different Trading Styles

Scalping

High frequency, small targets.

Cost Impact:

• Trading costs critical (many trades)
• A 2-pip spread on a 5-pip target = 40% of profit
• Scalpers need the tightest spreads possible
• Commission models often better

Recommendation: Use ECN brokers with raw spreads and commissions. Every 0.1 pip saved matters.

Day Trading

Multiple trades per day, medium targets.

Cost Impact:

• Costs significant but manageable
• A 1.5-pip cost on 30-pip targets = 5% of profit
• Need competitive spreads

Recommendation: Balance spread costs with execution quality. Low spreads are important but not at the expense of everything else.

Swing Trading

Trades held days to weeks, larger targets.

Cost Impact:

• Costs matter less proportionally
• 2-pip cost on 200-pip target = 1% of profit
• Focus more on execution and reliability

Recommendation: Spreads matter less than broker reliability, regulation, and swap rates (overnight fees).

Position Trading

Trades held for weeks to months.

Cost Impact:

• Entry spread nearly negligible
• Swap rates become much more important
• Broker stability crucial

Recommendation: Prioritize positive swap rates (or minimal negative swaps) and broker security.

How to Minimize Trading Costs

Choose the Right Broker

Compare Total Costs:

• Get spread data from multiple brokers
• Calculate effective spreads with commissions
• Check spreads during different market conditions

Consider Account Type:

• Standard accounts: Spread only
• ECN/Raw accounts: Spread + commission (often cheaper total)
• VIP accounts: Reduced costs for larger deposits

Trade at Optimal Times

Best Times for Tight Spreads:

• Major session overlaps
• Normal trading hours (avoid extremes)
• When liquidity is high

Avoid:

• News releases (spreads spike)
• Low-liquidity hours
• Weekend rollovers

Choose Liquid Pairs

Maximize Efficiency:

• Trade major pairs for tightest spreads
• Avoid exotics unless you have specific edge
• Consider spread impact on your targets

Use Limit Orders When Possible

Potential Benefits:

• May get filled at better prices
• Some brokers offer reduced spreads on limits
• Avoid immediate spread cost

Scale Position Appropriately

Larger Positions:

• Cost per lot drops with some brokers (volume rebates)
• Negotiate better rates with high volume

Hidden Costs to Watch For

Swap/Rollover Fees

Charges for holding positions overnight. Can add up significantly for swing traders.

Deposit/Withdrawal Fees

Some brokers charge for funding or withdrawing.

Inactivity Fees

Monthly charges if you don't trade for a period.

Currency Conversion

If your account currency differs from your deposit currency.

Data Fees

Some brokers charge for real-time data or premium features.

Slippage

Not a direct fee, but executions at worse prices cost money.

Conclusion

Trading costs are a fundamental part of forex trading that every trader must understand. Whether expressed as spreads, commissions, or both, these costs directly affect your profitability.

Key Takeaways:

• Understand your broker's cost structure completely
• Calculate effective spreads for accurate comparison
• Match your broker choice to your trading style
• Trade at optimal times for tight spreads
• Focus more on costs if you're a high-frequency trader
• Don't forget hidden costs like swaps and fees

The goal isn't necessarily to find the absolute cheapest broker—it's to find the best value considering all factors: costs, regulation, platform, execution, and support.

Keep trading costs in perspective. They matter, but they're just one factor in trading success. A low-cost broker with poor execution or questionable regulation isn't a bargain. Find the right balance for your needs, and let competitive pricing be one of many criteria in your broker selection.

Every pip saved in trading costs is a pip added to your bottom line. Make sure you're keeping as much of your profits as possible.