The spread is very important in forex trading – a thing that every beginner who wants to trade forex successfully needs to learn very quickly. Spread is the difference between the bid and ask price. Therefore spread is your embedded cost when you open any position. If you find which forex broker has the lowest spread, then you will have an edge in trading.
Which spreads are important for your currency portfolio
Before you start your search for a forex broker with the lowest spread, you have to know what currency pairs you want to trade. Usually, forex brokers advertise their spread on EUR/USD.
EUR/USD, as the most traded currency in the world, is a good benchmark for marketing. However, if your strategy is to trade EUR/GBP or GBP/JPY, low spread on EUR/USD has no value for you.
First of all, you have to make a little plan. Put on a paper list of currency pairs you want to trade.
Put a weight of importance to every currency pair on a list. And now, you can start a search for a forex broker with the lowest spread.
Take all forex brokers active on the domestic markets you consider as relevant for opening your account. After you get spreads for all currency pairs from your list, weight them with the importance you noted at the start.
Then make a weighted average of the spreads, and you will get the winner.
What are the average spreads
You will see that on EUR/USD, you will find a lot of brokers with a spread as low as 0.1 pips. (1 pips = 0.0001 USD per 1 EUR). The industry average is around 0.5 pips.
EUR/USD has artificially low spreads due to high competition. As we already wrote, EUR/USD spread is an important marketing tool.
Other currency pairs have higher spreads. Major currency pairs (USD/JPY, GBP/USD) spreads are around one pip.
Minor currency pairs (e.g., USD/CAD, EUR/JPY) spreads are around two pips. Exotic or emerging currency pairs have ranges much higher depending on liquidity and state of the forex market in that currency.
Now you know that it is not important what marketing of forex brokers tells you. You have to care about the spreads of currency pairs you wanna trade.
What affects spreads?
The basic rule is that less liquid currency pair has a higher spread than more liquid currency. Also, the spread can be substantially wider in times of market crisis.
Even the spread of EUR/USD was higher at times of some important market-moving event (e.g. presidential elections or FED statements). In the case of exotic or emerging currency pairs, the spread can be exorbitant in volatile times.
Spread is not everything
Which forex broker has the lowest spread is just one thing, you have to consider when choosing a forex broker. Do not forget to look for any additional fees your broker can charge you.
Some brokers will charge you a fixed fee for options trade or will punish you in case you will swap your position overnight, or will have a fee in case of withdrawal of money.
The difference between profit and loss is minimal and sometimes depends on tiny, almost invisible things you do or don’t do.
Therefore, you should follow all factors mentioned above. They influence your profitability, and you should consider all of them before you open your account.