What you will learn
- 1Understand bid vs ask
- 2Calculate spread in pips
- 3Convert pips to dollars
- 4Compare raw vs standard accounts
- 5Factor in commissions
- 6Use a spread calculator
- 7Choose the right account type
Estimated reading time: 10 minutes
Spreads are the single largest recurring cost in forex trading, yet most beginners do not fully understand how they work. This tutorial explains what spreads are, how to convert them into real dollar amounts, and how to choose the account type that minimises your costs.
Step 1: Understand Bid vs Ask
Every currency pair has two prices displayed side by side. The bid price is the highest price a buyer is willing to pay — this is the price you receive when you sell. The ask price is the lowest price a seller will accept — this is the price you pay when you buy.
The difference between the bid and the ask is called the spread. If EUR/USD shows a bid of 1.08500 and an ask of 1.08520, the spread is 0.00020, or 2.0 pips.
Screenshot tip: On MetaTrader 5, right-click a currency pair in the Market Watch panel and select "Spread" to add a column showing the live spread in points. Divide by 10 to convert to pips for five-digit brokers.
The spread is not a fee the broker charges separately — it is built into the price. The moment you open a trade, you are automatically "down" by the spread amount. Your trade only becomes profitable once the price moves beyond the spread.
Step 2: Calculate Spread in Pips
A pip is the standard unit of measurement in forex. For most currency pairs, one pip equals 0.0001 (the fourth decimal place). For Japanese yen pairs, one pip equals 0.01 (the second decimal place).
To calculate the spread in pips, subtract the bid from the ask and divide by the pip size. For EUR/USD at bid 1.08500 and ask 1.08520: (1.08520 - 1.08500) / 0.0001 = 2.0 pips.
Many platforms show spreads in "points" rather than pips. A point is one-tenth of a pip. A spread shown as 20 points equals 2.0 pips.
Step 3: Convert Pips to Dollars
The dollar value of a pip depends on the lot size and the currency pair. For a standard lot (100,000 units) on EUR/USD, one pip equals approximately $10 USD. For a mini lot (10,000 units), one pip equals $1. For a micro lot (1,000 units), one pip equals $0.10.
If the spread on EUR/USD is 1.5 pips and you trade one standard lot, the spread costs you $15 on entry. This cost is per trade, so active traders who open dozens of positions per day can accumulate significant spread expenses.
Screenshot tip: Use the built-in trade calculator in your platform or the broker's website calculator. Enter the pair, lot size, and account currency. The calculator will show the exact cost in your currency, accounting for exchange rate differences.
Step 4: Compare Raw vs Standard Accounts
Brokers typically offer two account types. A standard account marks up the spread by 1 to 2 pips and charges no commission. A raw spread or ECN account passes through the interbank spread (often 0.0 to 0.5 pips) and charges a fixed commission per lot.
For example, Pepperstone's Standard account shows an average EUR/USD spread of 1.1 pips with zero commission. The Razor account shows an average of 0.1 pips with a $7 round-turn commission. On one standard lot, the Standard account costs roughly $11. The Razor account costs approximately $1 (spread) plus $7 (commission) = $8. The raw account saves you $3 per trade.
Step 5: Factor in Commissions
Commissions on raw accounts range from $3 to $7 per round-turn lot across major brokers. The commission is charged when you open and close the position — some brokers split it equally, others charge the full amount on entry.
Always add the commission to the spread cost before comparing. A broker advertising "0.0 pip spreads" with a $7 commission is not cheaper than a broker showing 0.5-pip spreads with a $3 commission. The first costs $7 all-in; the second costs $8 all-in. The difference is small — but over hundreds of trades, it compounds.
Step 6: Use a Spread Calculator
Most reputable brokers provide a cost calculator on their website. Enter the currency pair, your lot size, and the account type. The calculator returns the spread cost, commission, swap rate, and total cost in your account currency.
Screenshot tip: Bookmark the spread calculator page. Before placing any trade, run the numbers to verify the cost matches your expectations. Spreads can widen during news events and illiquid hours.
Third-party tools like Myfxbook also publish live spread comparisons across brokers and account types. These tools are useful for verifying that a broker's advertised spreads match reality.
Step 7: Choose the Right Account Type
If you trade more than a few times per week, a raw spread account almost always works out cheaper. The lower per-trade cost adds up quickly. If you are a position trader who holds trades for days or weeks and only opens a handful per month, a standard account with no commission is simpler and the cost difference is negligible.
Some brokers also offer "zero" or "ultra-low" accounts that blend elements of both. Always calculate the total all-in cost before choosing — marketing names can be misleading.
Risk Disclaimer
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 65% and 82% of retail investor accounts lose money when trading CFDs with these providers. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. This tutorial is for informational purposes only and does not constitute financial advice.