spread - definition
Spread definition. Explained for Australia forex traders. Plain-English, no jargon. Calculation example included.
The spread is the difference between the ask price (the price at which you buy) and the bid price (the price at which you sell) for a currency pair. It represents the cost of opening a trade, paid to the broker as compensation for executing the order. The spread applies to all forex trades, whether you are trading major, minor, or exotic pairs, and is typically quoted in pips.
Formula
Spread = Ask Price – Bid Price
Example
A trader in Australia wants to buy EUR/AUD. The broker quotes an ask price of 1.6400 and a bid price of 1.6395. The spread is 1.6400 – 1.6395 = 0.0005, or 5 pips. The trader pays these 5 pips as the cost to enter the trade, regardless of whether the position later moves in their favour.
Edge cases
- JPY pairs: For pairs involving the Japanese yen (e.g., AUD/JPY), the spread is quoted to two decimal places instead of four. A spread of 0.03 pips means 3 pips in standard terms.
- ASIC regulation: Australian brokers regulated by ASIC must display spreads transparently, but variable spreads can widen significantly during high-impact news events (e.g., RBA rate decisions).
- Fixed vs variable spreads: Some brokers offer fixed spreads (constant regardless of market conditions), while others use variable spreads that fluctuate with liquidity. ASIC-regulated brokers typically use variable spreads.
See also
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