Understanding the Spread Dynamics in Foreign Exchange Operations

The Mechanics Behind Displayed Prices

When you access a trading platform on a forex broker, you immediately notice that each currency pair shows two distinct values simultaneously. This duality of prices is not random — it reflects a fundamental market concept: the spread.

The quote always shows two prices at the same time: the price at which you can BUY the base currency (known as ASK or purchase price) and the price at which you can SELL that same currency (BID or selling price). The numerical difference between these two quotes constitutes what we call the spread, also known by the technical term bid-ask spread.

For brokers that operate without explicit commissions, this spread represents their main source of revenue. Instead of deducting a separate fee from your trades, the cost is already embedded in the difference between the prices. The broker profits by selling the currency at a higher price than it paid to acquire it, and simultaneously gains by buying their own currencies at lower prices than they will receive when reselling. This intermediary margin is precisely the spread — a mechanism that compensates for liquidity and transaction speed services.

Identifying and Measuring the Spread

Calculating the spread is simple in practice: you just subtract the BID price (BID) from the ASK price (ASK). Most modern platforms already incorporate this difference into the real-time quotes you observe.

For currency pairs with five decimal places, the measurement follows a specific pattern. Similarly, when quotes display three decimal places, the calculation method remains the same — you identify the two prices and find their difference.

Two Fundamental Models: Fixed versus Variable

Brokers offer spreads according to two distinct operational paradigms:

Fixed Spread: Predictability as an Advantage

In this model, the difference between prices remains stable regardless of market fluctuations, trading hours, or economic turbulence. Brokers adopting fixed spreads typically operate as market makers or under the dealing desk model. These institutions acquire large volumes from their liquidity providers and distribute them to retail investors, acting as counterparties in the trades. This structure gives the broker authority over the prices displayed to clients.

Variable Spread: Fluctuation According to Market Dynamics

Conversely, variable (or floating) spreads change constantly. Their range expands or contracts in direct response to supply and demand oscillations and overall market volatility. Brokers that do not operate as dealing desks offer this model — they obtain quotes from multiple liquidity providers and pass them on to traders without intermediary dealing desks. Consequently, the broker does not control the spreads; they adjust according to the market. During economic data releases, holiday periods, or global events that reduce liquidity, spreads widen significantly.

Comparative Analysis: Gains and Limitations

Each model presents distinct characteristics for different trader profiles:

Advantages of Fixed Spread:

• Fully predictable transaction costs
• Usually requires lower initial capital
• Certainty about operational expenses

Limitations of Fixed Spread:

• Re-quotes; during extreme volatility, the broker may not react quickly enough, “freezing” their trading and requesting acceptance of an alternative price
• Slippage (slippages); when prices move rapidly, maintaining fixed spreads becomes impractical, resulting in execution at a price substantially different from the original intention

Advantages of Variable Spread:

• Less incidence of re-quotes
• Greater operational transparency
• Alignment with real market dynamics

Limitations of Variable Spread:

• Unsuitable for scalping — widened spreads quickly consume margins
• Problematic for news traders — spread expansion can turn seemingly profitable trades into instant losses
• Less predictable costs

Practical Calculation Methodology

To accurately determine the actual cost of a trade, you need two additional pieces of information: the pip value and the traded volume.

Let’s consider a practical example: suppose a quote where the spread equals the difference between 1.04103 and 1.04111, totaling 8 pips or 0.8 points.

For trades with a mini lot (10,000 units):

• Pip value: US$ 1
• Calculation: 0.8 pips × 1 mini lot × $1 = US$ 0.80

Expanding to five mini lots (50,000 units):

• Calculation: 0.8 pips × 5 mini lots × $1 = US$ 4.00

When you increase the volume or size of positions, simply multiply the pip cost by the number of lots to get the total transactional expense. This calculation provides complete transparency about how much the trade will cost you in terms of spread before even executing it.