Direct answer
A worked example of fixed spread shows how you can translate a constant bid-ask difference into a predictable transaction cost. The key is to state assumptions (spread size, position size, and units) and separate the spread cost from other costs that may still vary.
Mechanics and definition
In foreign exchange trading, the spread is the difference between the quoted bid (what you receive to sell) and ask (what you pay to buy). A fixed spread account treats that bid-ask difference as constant for a specified instrument, rather than letting it widen and narrow with market liquidity.
To model costs, you need these inputs:
- Spread (in price terms): for example, “0.0002” in quote currency price.
- Trade size: expressed in units or lots, which determines how much price movement becomes money.
- Direction: buy uses the ask; sell uses the bid.
A simple way to keep the example transparent is to compute the spread cost as:
- Spread cost in price units = spread × position value sensitivity (determined by lot size/unit convention).
Evidence or worked numerical example
Assume a simplified scenario with no real-time market data:
- The instrument’s fixed spread is 0.0002.
- You open a long position at an ask price, and then you close it later at a bid price.
- Assume a position size convention where 1 lot equals 100,000 units, and 1 price point move of 0.0001 corresponds to $10 (a common educational conversion assumption for many major FX pairs under standard lot sizing).
- Assume there are no additional fees and no swap/overnight charges in the holding period.
Step A: Convert the spread into money
- 0.0002 is two increments of 0.0001.
- If 0.0001 = $10, then 0.0002 = 2 × $10 = $20.
Step B: Interpret the cost
- When you buy, you pay the ask.
- When you later sell, you receive the bid.
- The difference between ask and bid at that time is the fixed spread (0.0002), so the spread component of the round-trip transaction cost is $20 per lot, under these assumptions.
Step C: Add a separate price-move component Now assume the market mid-price moves upward by 0.0010 between entry and exit. Using the same conversion:
- 0.0010 is 10 increments of 0.0001.
- That price improvement is 10 × $10 = $100 gain (before any other costs).
Under the assumptions above, the simplified round-trip result would be:
- $100 (favorable price move) − $20 (spread cost) = $80, again only for this worked, simplified model.
Limitations and failure modes
Even if an account is advertised as fixed spread, several factors can make real outcomes differ from this clean calculation:
- Execution differences: your actual entry and exit may not occur exactly at the assumed prices, especially during fast moves or low liquidity.
- Other costs not included: commissions, financing/overnight charges (swaps), and any platform/account fees can exist even when the spread is treated as fixed.
- Modeling assumptions: lot-to-dollar conversion depends on the instrument, contract specification, and quote/base currency relationships. If the conversion differs, the “$ per 0.0001” step changes.
- Scope limits: fixed-spread treatment may apply only to certain instruments or account conditions; if the instrument differs, the spread could behave differently.
These are material failure modes because they break the separation between “spread cost” and “everything else.” The worked example remains useful, but only to the extent that those assumptions match the real trading conditions.
Verification and next question
To verify fixed spread mechanics independently, compare a provider’s explanation of:
- how the spread is quoted for the specific instrument,
- whether any additional commissions or financing costs apply,
- what the contract specification implies for converting price increments to money.
A useful next question is: “Which exact costs besides the bid-ask difference apply to the account (fees and overnight charges), and what contract unit convention determines the money-per-pip calculation?”