How does Raw Spread work in forex?

Direct answer

Raw spread in forex refers to the portion of the bid-ask difference that comes directly from the market-style pricing the broker publishes for a “raw spread” account type. In practical terms, it is a way of presenting the spread as a low, market-linked number, and then recovering additional revenue through separate fees such as commissions. The exact composition of “raw” versus “extra” costs depends on the provider’s account terms and on execution conditions.

To explain how it works, it helps to separate: (1) what the spread means mechanically, (2) what raw spread tries to represent, (3) how the broker’s additional charges are added, and (4) what can make outcomes differ from simplified examples.

Mechanics and definition: what a spread is

In forex, you typically see two prices for the same currency pair: a bid and an ask.

Bid: the price at which you can sell.
Ask: the price at which you can buy.

The spread is the difference between these two prices. If spread is wider, the immediate cost of entering a trade is larger because a market move has to overcome the bid-ask gap before the position can be profitable.

Raw spread is a label for an account pricing model where the displayed spread is intended to be close to the underlying market bid-ask difference, rather than being “smoothed” by adding a markup into the quoted spread. The account then commonly charges a commission separately. This means that the “headline” spread you see may look smaller, while the all-in transaction cost can still include other parts.

Inputs: what affects the raw spread number

A raw spread quote you see is not a fixed constant. Even without assuming any real-time data, you can still identify the inputs that usually drive it conceptually:

Liquidity and order-book depth When there are many buyers and sellers, bid and ask prices can stay closer together. When liquidity thins out, the difference can widen.
Volatility and fast price changes When the market moves quickly, it becomes harder for providers to keep quotes tight. Spreads often widen during higher uncertainty.
Trade size and execution timing Spreads can differ in practice depending on how quickly an order is executed and how much liquidity is available for that size at the moment of execution.
Quote precision (how prices are measured) Forex instruments may be quoted with different decimal places. Converting the quoted difference into “pips” (or into account currency) requires knowing the quote format.
Provider fee model Even if raw spread is low, the provider may add compensation through commissions and/or other account-specific charges. These can make the total cost larger than what the spread alone suggests.

Outputs: what you actually pay

If you want to understand “how it works” in a usable way, focus on outputs that combine components into an all-in cost. A common conceptual structure is:

All-in cost for a round trip (enter + exit) ≈ (raw spread cost on entry) + (raw spread cost on exit) + (commissions, if charged) + (any other explicitly stated execution or account fees).

Two key points keep this accurate:

Raw spread is only one component.
The all-in cost depends on assumptions: round-trip or one-way, how the spread is measured (bid-ask at entry versus later), and the fee schedule.

Because this article assumes no live prices, you can think of the calculation steps rather than using real figures.

A worked example with explicit assumptions (no live data)

Assume:

You trade one standard lot.
The quote precision makes “1 pip” equal to the provider’s pip definition for the pair.
At the moment you open, the raw spread is measured as 1.6 pips.
At the moment you close, the raw spread is measured as 1.4 pips.
Commission is charged separately and is known from the account terms.
You ignore other factors like slippage beyond the spread measurement.

Then the spread-related cost conceptually becomes:

Entry spread cost: 1.6 pips
Exit spread cost: 1.4 pips
Total spread distance: 3.0 pips (sum for a round trip)

To convert pips into money, you must also assume or know the pip value for your instrument and position size (which can vary by pair and account currency). Only after that can you add the commission amount to estimate all-in transaction cost.

This illustrates the sequence:

Identify raw spread at execution moments.
Convert spread distance into money using pip value assumptions.
Add separate fees such as commissions.
Add or exclude other explicitly stated execution costs per the account terms.

Sequence: how raw spread typically flows through a trade

A provider’s “raw spread” model can be described as a sequence:

Quotes are published with a relatively tight displayed bid-ask difference (the “raw” portion).
When you place an order, the trade fills at the bid/ask available at that moment (subject to the execution rules).
Your position opening and closing each effectively incorporate the spread at the time of execution.
Separately, the account applies any stated commission or additional fees.
Your account statements summarize the total costs across the trade lifecycle.

Even when the displayed raw spread looks small, the statement still reflects the combined effect of spread plus separately charged costs.

Limitations and risks: where simplified thinking breaks

Raw spread can be misunderstood if you treat it as a direct measure of future profitability or as a stable number. Common limitations include:

Raw spread can widen quickly Liquidity and volatility change continuously. A raw spread account may show tight numbers most of the time, but it can still widen during stressful market conditions.
“Displayed spread” may not equal your realized execution cost If execution is delayed or partial fills occur, the realized price and the effective bid-ask distance can differ from the quote you expected.
Total cost depends on commissions and fees A smaller raw spread can be offset by higher commission, so the all-in transaction cost may not be lower than other account types. This is why you should compare costs using the provider’s fee schedule rather than relying on the spread figure alone.
Calculations depend on assumptions If you convert pips into money, pip value assumptions matter. If you measure only entry spread and forget exit spread, you underestimate the round-trip cost.