The bid is the highest price a buyer will pay right now. The ask is the lowest price a seller will accept. The gap between them is the spread, and it is the first cost of every trade, charged before the market moves at all.
Most explanations stop there. What they skip is the arithmetic: exactly how much that gap costs on a given position size, how that number compounds across a month of trading at different frequencies, and why it changes shape depending on the hour you trade, the instrument you pick, and even the type of account you trade through.
This article is organized around those questions, one chapter at a time.
Key Takeaways
- The spread is the gap between bid (sell price) and ask (buy price), and it's a real cost charged at entry, not just a number on screen.
- The same spread costs vastly different amounts depending on position size, from cents on a micro lot to tens of dollars on a standard lot.
- Spreads widen predictably around thin liquidity, news releases, and rollover, and tighten during the London-New York overlap.
- Comparing brokers on spread alone is misleading; the number that matters is spread plus commission combined.
What Bid and Ask Actually Mean
Every tradable instrument quotes two prices at once. If you sell right now, you sell at the bid. If you buy right now, you buy at the ask. The ask always sits above the bid, and that difference is the spread, quoted in pips for currency pairs or in the instrument's base unit for everything else.
A pip is the smallest standard price move for a currency pair, 0.0001 for most pairs quoted to four decimal places, or 0.01 for pairs like USD/JPY quoted to two. A tighter spread means a smaller gap and a lower cost to enter. A wider spread means the opposite, and it usually means thinner liquidity behind the quote.
The Order Book Behind the Two Prices
Behind bid and ask sits an order book, the running list of every buy and sell order waiting to be filled at every price level. The bid you see is simply the highest resting buy order at that instant. The ask is the lowest resting sell order.
When a new order matches an existing one, a trade happens and the book updates. This matters because the bid and ask are not fixed prices set by an exchange; they are the current best offers among many competing participants, and they move continuously as those offers change.
Fast Fact
- A 1.2-pip spread on one standard lot of EUR/USD costs $12 to enter, before the trade has moved at all.
The Real Cost of the Spread
Open a trade and you start behind by the exact width of the spread. That's true whether the position moves in your favor a second later or not. The size of that starting deficit depends on two things: the spread in pips and the value of a pip at your position size.
How to Calculate the Cost
Pip value scales directly with lot size. On EUR/USD, a standard lot (100,000 units) moves $10 per pip. A mini lot (10,000 units) moves $1 per pip. A micro lot (1,000 units) moves $0.10 per pip. Multiply pip value by the spread in pips, and that's the cash cost of entry, before the trade has moved a single tick.
Walk through one example in full. A trader opens one standard lot of EUR/USD with a 1.2-pip spread. Pip value at that size is $10, so the cost is 1.2 times $10, or $12. The position needs to move 1.2 pips in the trader's favor just to reach breakeven on the spread alone, before accounting for any commission or overnight financing.
Scale that same trade down to a micro lot and the identical 1.2-pip spread costs $0.12, a difference of a hundredfold driven entirely by position size, with the percentage cost relative to account risk staying identical.
That bottom row is why exotic pairs and low-liquidity crosses carry a materially different cost structure than EUR/USD. Tested EUR/USD spreads across major brokers average roughly 0.86 pips on standard accounts and can run near zero on raw ECN pricing before commission, while an exotic pair spread of 20 pips or more is common.
The instrument you choose sets your cost floor before your strategy does, and it's worth running this table for whatever pair you actually trade rather than assuming EUR/USD pricing applies across the board.
What It Costs You Over a Month
A single trade's cost looks small. Multiplied by trading frequency over a month, it stops looking small.
The table below assumes a mid-range spread environment and typical position sizing for each style. Adjust the inputs to your own numbers; the method is what matters, not the specific figures.
The scalper trades the smallest size but the highest frequency, and ends up paying the most in cumulative spread cost despite each individual trade being cheap. Over a year, that $200 monthly figure becomes $2,400 paid in spread alone, before a single win or loss is counted.
This is the calculation most traders never run, and it's the reason two strategies with identical win rates can produce very different net results. A scalping approach needs a noticeably higher edge per trade just to clear the spread cost that its own frequency generates.
Why the Spread Moves
The spread isn't fixed even on a variable-spread account. It expands and contracts through the day based on liquidity, and understanding the pattern helps explain why the same trade can cost noticeably more at 11pm than at 2pm.
Liquidity by Session: the London to New York Handover
Currency markets run through overlapping sessions: Sydney, Tokyo, London, New York. Liquidity is deepest when two major sessions overlap, and the London–New York window, roughly 12:00 to 16:00 UTC, produces the tightest spreads of the trading day.
Outside that overlap, and especially during the Asian session when only Tokyo and Sydney are active, tested data shows EUR/USD spreads running 30 to 50 percent wider than they do during the London–New York overlap.
Forex market hours run continuously from the Sydney open on Monday morning through the New York close on Friday afternoon, but continuous availability isn't the same as continuous liquidity, and the spread is the clearest signal of the difference between the two.
Widening Around High-Impact Releases
Ahead of major economic data, nonfarm payrolls, central bank rate decisions, market makers pull in their quotes because the range of likely outcomes widens sharply. Spreads on affected pairs can multiply several times over in the seconds around the release, then normalize once the initial reaction settles.
Placing a market order into that window means accepting whatever spread is showing at that instant, which can be several times the pair's normal cost.
The Rollover Window
Once a day, typically around 21:00–22:00 UTC (5pm New York), open positions are marked for the swap rate, the overnight interest adjustment for holding a leveraged position past that point.
The swap rate itself reflects the interest rate differential between the two currencies in the pair, and it can add to or subtract from a position's cost depending on direction. Liquidity thins in the minutes surrounding rollover as banks square their books, and spreads widen briefly as a result.
It's a poor window to open new positions if you can avoid it, and a factor worth checking if a position is held long enough to cross that daily boundary.
Holidays and Thin Books
Public holidays in major financial centers, even ones that don't close the forex market outright, reduce the number of active participants. A thinner order book means fewer resting orders at each price level, which is exactly the condition that produces wider spreads and a higher chance of a requote, a rejected order resubmitted by the broker at a new price because the original quote is no longer available by the time the order reaches the liquidity provider.
Fixed vs Variable Spreads
Some brokers offer fixed spreads that stay constant regardless of market conditions, useful for cost predictability but often wider on average than variable pricing during calm periods.
Variable spreads track real market liquidity, tightening when the book is deep and widening exactly when it thins, at news releases, rollover, and outside the main sessions.
Neither structure is universally cheaper; the right choice depends on whether a trader values predictability or values the lower average cost that comes with accepting occasional spikes.
Who Actually Sets the Bid and Ask
The two prices come from liquidity providers, typically banks and financial institutions that continuously stream quotes into the market. A market maker holds an inventory and quotes both sides directly, profiting from the spread while taking on the other side of client trades.
In an electronic market, the visible bid and ask are simply the best prices resting in the order book at that instant, the highest price a buyer has committed to and the lowest a seller has committed to.
Depth of Market and Level 2 Data
Depth of market, sometimes shown as level 2 data, extends this picture beyond the best bid and ask to show the full stack of resting orders at each price level.
A market with deep, well-stacked orders on both sides tends to hold tighter spreads under pressure than one with only a handful of orders near the top of the book, which is exactly why liquidity and spread width move together.
A trader watching level 2 data can see a widening spread coming a moment before it shows up on a standard quote panel, because the depth thins first.
Spread Betting vs CFD Trading
The bid-ask mechanics are identical between spread betting and CFD trading; both quote a buy and sell price with the difference built into the cost of entry.
The distinction is structural rather than pricing-related. Spread betting, available in some jurisdictions, treats each position as a bet on price direction per point of movement, with profits typically treated differently for tax purposes than a CFD position, which is a contract to exchange the difference in an asset's price between opening and closing a trade.
Both instruments carry the same core lesson from this article: the quoted spread is the entry cost regardless of which wrapper the trade sits inside, and comparing the two requires looking at the same all-in cost calculation covered in the next chapter.
Comparing Broker Costs Properly
Comparing brokers on spread alone is the most common mistake in cost shopping. A broker advertising a 0.0-pip raw spread account is not free; the cost has simply moved to a per-lot commission charged separately. The number that matters is the all-in cost: spread plus commission, converted to a single figure per lot.
An account with a 0.1-pip average spread and a $3.50 round-turn commission costs roughly $4.50 per standard lot in total. A commission-free account advertising a 0.8-pip average spread costs about $8.00 per standard lot for the same trade. The headline spread number, taken alone, points the wrong direction.
Check any comparison against your own broker's live conditions rather than a marketing page. Spreads move with the market, and a figure quoted for one session doesn't hold across all of them.
Transaction Cost Analysis: The Institutional Version of This Math
Institutional desks formalize exactly this comparison under the name transaction cost analysis, a systematic review of what execution actually cost against a benchmark price, spread, commission, and slippage combined into one measurable figure per trade.
Retail traders rarely run anything this formal, but the underlying habit transfers directly: log the spread paid, the commission charged, and any slippage between the intended and filled price on a sample of trades, then compare that total against a different broker or account type under the same market conditions.
A handful of trades logged this way says more about real cost than any broker's advertised spread table.
Conclusion
The spread is easy to overlook because it never shows up as a separate line item, it's simply baked into the price you see. But once you run the numbers by position size and multiply them across a month of trading, it stops being background noise and becomes a real, predictable cost that belongs in the same planning conversation as risk and position sizing.
None of this is about avoiding the spread altogether, that's not possible on any instrument. It's about knowing which sessions, position sizes, and account types make it smaller relative to what you're trying to achieve, and comparing brokers on the number that actually matters: spread plus commission, not spread alone.
FAQ
What is a pip?
The smallest standard price move for a currency pair, usually 0.0001.
What's the difference between bid and ask?
The bid is what buyers pay; the ask is what sellers accept. The gap between them is the spread.
Why do spreads widen at certain times?
Thin liquidity, low-volume sessions, news releases, and rollover all reduce depth in the order book, which widens the spread.
Does a zero-spread account mean free trading?
No. The cost usually shifts to a per-lot commission, so the all-in cost is what matters.
What is slippage?
The gap between the price you expected and the price your order actually filled at, common in fast or thin markets.
