Key Takeaways
- The spread is the difference between the bid and ask price. It is the primary cost of every trade
- A pip is the standard unit of price movement in forex, typically the fourth decimal place
- Your real trading cost includes the spread, commissions (if any), and swap fees for overnight positions
- High-frequency traders pay more in cumulative spreads, so account type selection directly affects profitability
What Is a Pip?
A pip is the smallest standard price increment in forex, and it is the foundation of how traders measure profit, loss, and cost.
Pip Definition
For most currency pairs, a pip is 0.0001, the fourth decimal place. For JPY pairs, a pip is 0.01, the second decimal place. Many brokers quote an extra decimal (a 'pipette' or 'point') for more precise pricing.
Pip Value
The monetary value of a pip depends on the pair, lot size, and your account currency. For a standard lot (100,000 units) of EUR/USD, one pip equals approximately $10. For a mini lot (10,000 units), it is approximately $1.
Measuring Movement
If EUR/USD moves from 1.0850 to 1.0875, that is a 25-pip move. If you bought one standard lot at 1.0850, your profit would be approximately $250 (25 pips x $10/pip) before costs.
What Is the Spread?
The spread is your broker's primary source of revenue on each trade, and your primary cost.
Bid vs Ask Price
The bid is what buyers will pay; the ask is what sellers want. The spread is the gap between them. If EUR/USD shows 1.0850/1.0852, the spread is 2 pips. You always buy at the ask and sell at the bid.
Variable Spreads
Spreads fluctuate based on market liquidity and volatility. During major news events or low-liquidity hours (e.g., between the New York close and Tokyo open), spreads typically widen. Liquid pairs like EUR/USD have tighter spreads than exotic pairs.
Spread as an Implicit Cost
Every trade you open starts at a small loss equal to the spread. On a 2-pip spread with a standard lot, you start each trade approximately $20 behind. This cost must be recovered before you reach profitability on that trade.
What Does a Trade Actually Cost?
The spread is not your only cost. A complete picture of trading expenses includes all fees that affect your bottom line.
Spread Cost
The primary cost per trade. Calculated as spread (in pips) x pip value x lot size. On a 1.5-pip spread with one standard lot of EUR/USD, the cost is approximately $15 per round trip.
Commission (Raw Spread Accounts)
Some account types charge near-zero spreads plus a fixed commission per lot. This model often results in lower total cost for high-volume traders. Always compare spread + commission together.
Swap / Overnight Fees
Positions held overnight incur swap fees based on the interest rate differential between the two currencies. These can be positive or negative. Swap-free (Islamic) accounts are available at StoicFX for traders who require them.
Slippage
The difference between your expected execution price and the actual fill. Slippage occurs during fast-moving markets and can increase or decrease your cost. Brokers with strong liquidity infrastructure minimize negative slippage.
Frequently Asked Questions
What is considered a good spread for EUR/USD?
Competitive brokers offer EUR/USD spreads that can start near 0.0 pips on raw-spread accounts (with commission) or around 1.0-1.5 pips on standard all-inclusive accounts. Always evaluate total cost (spread + commission), not just the spread in isolation.
Why do spreads widen during news events?
Liquidity providers pull back their quotes during high-impact news because the risk of adverse price movement increases sharply. With fewer quotes in the order book, the gap between bid and ask naturally widens. This is a normal market function, not a broker manipulation.
Is it better to pay a spread or a commission?
For frequent traders, raw spread + commission accounts typically offer lower total cost. For occasional traders, an all-inclusive spread is simpler. Both models exist because different traders have different needs. StoicFX offers both through its account types.
How do I calculate my cost per trade?
Total cost = (spread in pips x pip value x lots) + commission (if any). For example: 1.2-pip spread x $10/pip x 1 lot = $12 spread cost. Add any commission per lot. For overnight positions, add the swap rate. This gives you the breakeven threshold for the trade.
What spreads does StoicFX offer?
StoicFX offers competitive spreads across all account types, with pricing sourced from institutional liquidity providers. Exact spreads vary by pair and market conditions. Visit the accounts page for detailed spread specifications by account type.
How can I reduce my trading costs?
Choose an account type that matches your trading frequency, trade during high-liquidity hours (London-New York overlap), focus on major pairs with tighter spreads, and avoid holding positions overnight unnecessarily if swap costs are significant for your strategy.
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