How its cost is calculated
The spread is quoted in pips, but what matters is its money value: multiply it by pip value and lot count. A one-pip spread costs $10 on a standard lot and $1 on a 0.1 lot. The calculation is worked through in bid, ask and spread.
The decisive point is that a spread is not high or low in itself but relative to your target: 1.5 pips is 30% of a 5-pip target and under 1% of a 200-pip one.
When it widens
A variable spread widens in predictable situations: the moment high-impact data lands, at the market open after a weekend, in the thin hours between the New York close and the Tokyo open, and in exotic pairs throughout. Choosing your trading window lowers this cost without changing your strategy at all.
The formula
Spread cost = spread in pips × pip value × number of lots
A worked example
A 1.2-pip spread on half a standard lot of a pair worth $10 per pip per full lot costs 1.2 × 10 × 0.5 = $6 to open. Someone taking ten such trades a day pays $60 daily — about $1,320 a month before any market loss.
Common mistakes with this term
- Comparing spreads between brokers at different times; a fair comparison measures the same pair in the same minute.
- Choosing a broker on spread alone without counting commission and execution quality.
- Setting a very tight stop without accounting for the spread, so a momentary widening triggers it.