Why Are Spreads so Important to Forex Traders?

It is important to pay close attention to spreads because they are the true cost of trading (and the way the broker makes a profit).

As a trader, your sole interest is buying low and selling high. But wider spreads mean buying higher and having to sell lower, making it more difficult to realize a profit. A half-pip lower spread doesn't sound like much, but it can easily mean the difference between a profitable trading strategy and an unprofitable one.

To give you an idea of the impact that spreads have, let’s assume your total forex trading or hedging activity in one year is $10 million. At a 1-pip spread, your trading costs are $1000 ($10,000,000 X 0.0001). Increase the spread to 10 pips, however, and your trading costs jump to $10,000 ($10,000,000 X 0.0010). Spread matters.

Not convinced? To calculate and compare the impact of spreads on various trade scenarios, see OANDA's spread cost calculator. This tool shows you how even a pipette or two in either direction can affect your profits.