- The concept of the spread
- How Spreads Make a Difference in Forex Trading
- What low spread trading means for a trader
- How Fixed Spreads Can Benefit You
- The effect of low spreads on the trader’s money
- Key requirements for low spread trading
- Does the broker type favour low spread offerings?
- LOW Spread Forex Brokers 2019 - Best Broker 2019
- Forex Forecasts
- Low spread brokers for you
The major trading cost to the forex trader is the spread, which is the difference between the bid and ask prices of a forex pair. The desire to get the lowest trading spreads has become one of the major forex brokerage selection criteria.
There is a lot of competition for traders in the market right now, and one of the incentives used by brokers is to offer lower spreads than the competition. This article will seek to explain the benefits of using low spreads, and will introduce the low spread forex brokers that we have identified as being the best for you to work with.
The concept of the spread
Spreads are the difference between the bid and ask prices in the market.
To explain this further, the spread is the difference between the price at which the dealer buys the asset from another trader or from the interbank market, and what the trader eventually buys the asset from the dealer.
The difference is known as the spread and represents the compensation to the broker for providing the trader with access to the forex market.
Spreads are a function of how much a broker is willing to sell an asset to traders, as well as how liquid the asset is. Liquid currency pairs such as the EUR/USD and GBP/USD typically attract lower spreads than the illiquid pairings that feature currencies such as the Norwegian, Danish and Swedish Crowns, or the South African Rand.
How Spreads Make a Difference in Forex Trading
Spreads can also be affected by volatility, and it is possible for spreads to widen considerably when the markets are very volatile: a phenomenon known as slippage.
Trading costs are cumulative and can add up quickly.
That is why it is essential to operate with a broker that not only gives you low spreads under normal market conditions, but also under conditions of excessive volatility. Such forex companies are the best low spread brokers.
It is all about being able to keep more money in your pocket at the end of the day. In the following sections, a demonstration will be made of how tight spreads can impact the trader’s capital in monetary terms and how much can be saved over time from even the minutest reductions in spread.
What low spread trading means for a trader
The use of low spread brokers will impact traders in several ways:
A) The use of low spread automatically leads to a reduction in trading costs, especially if you are a high volume trader.
For instance, if you are a scalper who takes approximately 300 trades a month on the EUR/USD using a Standard Lot each time, a reduction in spreads by 1 pip is a savings of $10 per pip, and $3,000 a month.
That is massive.
B) Low spread trading leads to a reduction in risk to the trader by improving the risk-reward ratios in trades.
How Fixed Spreads Can Benefit You
Again, this is a cumulative effect. If the trader is targeting 30 pips in profit for every 1 pip risked as Stop Loss, and the trader takes 50 trades in a month, a reduction of 1 pip will lead to a risk-reward ratio of 450: 1500, as opposed to 500:1500. This will have a knock-on effect down the road of ensuring that it will take more losses to negate a profitable trade.
C) The money that is cumulatively saved from trading with low spreads can be made available for bigger volume trades, or withdrawn and used for other things.
The effect of low spreads on the trader’s money
Perhaps the most important factor here has to do with how much a trader can save from trading with low spread brokers, and this is typified in the example that is set out below.
A trader wants to trade 5 Standard Lots position (worth $50 per pip) on GBP/USD using an ECN platform and is offered the following prices by one liquidity provider:
- Broker 1: Bid/Ask = 1.27308/1.27323 (Spread is 1.5 pips)
Another liquidity provider offers the trader pricing as follows:
- Broker 2: Bid/Ask = 1.27307/1.27317 (Spread is 1 pip)
Trade execution using Broker 1’s pricing with a spread of 1.5 pips will lead to a spread cost of $75.
Execution using Broker 2’s pricing will lead to a spread cost of $50. Savings on the spread for this trade will be $75 -$50 = $25.
Assuming the trader takes 20 of such trades in a month, this translates into savings of $25 X 20 = $500. 250 of such trades in a year will lead to savings of $25 X 250 = $6,250.
When trading CFDs on commodities or trading assets such as gold which usually have large spreads, there can be significant cost savings on spreads between two brokers.
This goes to show the benefit of using low spread brokers for trading.
Key requirements for low spread trading
It is one thing for a broker to advertise “low” spreads, but it is another thing for the trader to really get these tight spreads in real market conditions.
Does the broker type favour low spread offerings?
Here are the key things to look out for to ensure that you are really trading with low spreads.
A) Some brokers offer multiple account types, each with different spreads.
If you are on such a brokerage platform, compare each account type and the spreads that are offered to see what differences in spreads truly exist.
LOW Spread Forex Brokers 2019 - Best Broker 2019
You should also compare any other trading costs (such as commissions). For instance, an ECN account may offer spreads that are as low as zero, but this can quickly be offset by high commissions.
You need to watch out for this.
B) Some brokers tend to offer variable spreads. This is a feature on ECN platforms.
Thankfully, some of the low spread brokers listed below offer ECN accounts that do not have so much variability in spreads. Indeed, you can view the bid-ask prices from several liquidity providers and select the ones that come with the lowest spreads that do not become too variable during certain market conditions.
C) To make the best of low spread trading, avoid trading assets that are known to have heavy volatility.
D) Ensure that the low spread broker you are using offers superior, ultra-fast execution with as little latency as possible.
If you can get access to a VPS and the broker allows this, please use it to reduce your latency even further.
To achieve this, your VPS should be co-located with the servers of your broker.
Low spread brokers for you
Our list of low spread brokers features brokers from various jurisdictions. These brokers offer some of the lowest spreads over a wide range of markets.
Some of the brokers have ECN platforms and can provide you with aggregated pricing from various liquidity providers. For instance, TradeView has close to 5,000 assets that can be traded on its platforms, using low spreads, and typically uses its proprietary price aggregation engine to deliver pricing from as many as 8 liquidity providers.
Feel free to check out each of these brokers and what they have to offer, and start trading under tight spread conditions today for more profitable and cost-effective trading.