The spread refers to the difference between the selling (Bid) price and the buying (Ask) price of a currency pair. The selling price indicates the highest price at which buyers are willing to buy in the market, while the buying price indicates the lowest price at which sellers are willing to sell. Spreads vary between brokers and exchanges but are typically presented as either fixed or variable spreads.

Here’s a specific example:

If the selling price of the EUR/USD currency pair is 1.2000 and the buying price is 1.2005, the spread would be the difference between these prices, which is 0.0005 (or 5 pips). If a trader places a sell order for this currency pair, the order would be executed at 1.2000, and the trader would sell the currency at this price. Similarly, if a trader places a buy order, it would be executed at 1.2005, and the trader would buy the currency at this price.

The spread acts as a fee for brokers or exchanges. Brokers earn profits from the difference between the selling and buying prices. Spreads typically fluctuate based on the liquidity provided by the exchange and market conditions. Major currency pairs (e.g., EUR/USD, GBP/USD) generally have narrower spreads due to higher liquidity, resulting in lower trading costs. In contrast, minor or exotic currency pairs usually have wider spreads, leading to higher trading costs.

For traders, the spread is a part of the trading cost, and it is common to choose brokers offering narrower spreads. The narrower the spread, the more favorable the trading price for the trader. Additionally, spreads can vary based on market liquidity and trading hours, so traders should consider market conditions to select the optimal trading timing.