What is the Spread?
When learning to trade Forex, the spread is one of the first concepts you need to grasp. It affects your trading costs, which impacts your profit. The spread is the difference between the broker’s sell rates and buy rates when exchanging or trading a currency.
In other words, the spread is the difference between the bid price (the price at which you can sell) and the ask price (the price at which you can buy). Brokers charge spreads as a fee for enabling the trades.
Spread values can fluctuate a lot. Factors like the currency pair you are trading, the time of day, and the economic conditions that surround that pair can change your spread.
Why are low spreads important?
- Cost Reduction: Low spreads can help traders to reduce their trading costs. Each time a trade is executed, the trader has to overcome the spread cost to get into a profitable position. The lower the spread, the less the price needs to move in the trader’s favour before they start to make a profit, and the more the price can move against the trader before they start to incur a loss.
- Higher Frequency Trading: Traders, especially those using high-frequency trading strategies like scalping and day trading, must enter and exit the markets frequently. Lower spreads mean they pay less to execute these trades.
- Increased Potential Profits: When the spread is lower, the distance to a profitable trade decreases. This can potentially increase a trader’s profitability, especially in volatile markets.
How do brokers with low spreads make money?
In the world of forex trading and other types of investment, brokers typically earn money in one of two ways: through spreads and commissions.
A spread is the difference between the buying price and the selling price of a financial instrument. The spread is essentially the broker’s profit on each trade a trader makes.
On the other hand, a commission is a fee that a broker charges for its services. This is generally a flat fee per trade or a percentage of the total volume of the trade.
Now, let’s consider brokers who offer low spreads. These brokers essentially offer to execute trades at prices very close to the market price. This can be attractive to traders because it reduces their trading costs. However, because these brokers make less money from the spread, they may charge a commission to compensate for the lower profit margins.
The commission can be seen as a fee for the broker’s service of facilitating the trade. For a broker offering low or even zero spreads, the commission may be their primary source of income.
The Advantages and Disadvantages of Trading with Low Spreads
Each broker is unique, but some main features distinguish low-spread Forex brokers. These are the main ones:
Advantages
- Lower Transaction Costs: The spread is the difference between the buy price and the sell price for a certain currency pair. The lower it is, the easier it is for traders to profit from a transaction. This results in lower transaction costs for the trader, especially for those engaged in high-frequency trading, such as day traders or scalpers and can increase the net profit from each trade.
- Transparent Pricing: Low spreads coupled with a commission-based pricing model tend to be more transparent. The broker makes money from the commission, and the spreads are closer to the underlying market prices. This can provide a clearer view of the market conditions and facilitate better trading decisions.
What are the disadvantages of trading with low spreads?
There are, of course, some downsides to low spreads. The most important disadvantages to using low-spread forex brokers are the following:
- Commissions Can Add Up: If you are a high-frequency trader, commission fees might get expensive as they add up. In these cases, it might be better to go for a higher spread with no commission.
- Complex Fee Structure: Understanding and calculating costs can be more complex with a low spread and commission model. Traders need to consider both the spread and the commission in their cost analysis, which can be confusing, particularly for novice traders.
Whether a low spread and commission model is advantageous depends largely on the trader’s strategy and trading frequency. Each trader must understand their own trading habits, calculate their potential costs under different pricing models, and choose the broker that offers the most cost-effective solution for their specific needs.
What is the difference between fixed and variable spreads?
Fixed spread brokers offer spreads that do not change, no matter the market conditions, whereas variable spreads could be lower, but fluctuate throughout the trading day.
In Forex trading, the difference between fixed spreads and variable spreads is quite important when deciding which broker to trade with. Here’s a breakdown of the main differences:
Fixed Spreads:
- Consistency: Fixed spreads remain the same no matter the market conditions.
- Predictability: Since these spreads don’t depend on the markets, they are predictable for traders. And predictable often means safer.
- Market Makers: Fixed spreads are usually offered by market makers, who set both the bid and the ask prices for their clients, taking the opposite side (or the counterparty) of their trades. This means that when the trader wins, the broker loses, and vice versa.
- Higher Costs During Low Volatility: While fixed spreads provide stability, when there is low market volatility, they may be higher on average. This leads to potentially higher trading costs.
Variable Spreads:
- Market Conditions: Variable spreads fluctuate based on market conditions, including liquidity and volatility. This means the spread can be very low during times of high liquidity but can widen significantly during major economic announcements or market uncertainty.
- Lower Costs Potentially: During periods of high liquidity, variable spreads can be lower than fixed spreads, potentially reducing trading costs.
- ECN/STP Brokers: Variable spreads are often associated with ECN (Electronic Communication Network) or STP (straight-through processing) brokers, who pass the orders directly to liquidity providers without a dealing desk. This means traders are getting real market prices.
The choice between fixed and variable spreads depends on a trader’s strategy, trading style, and risk tolerance. Fixed spreads offer predictability and simplicity, which can be beneficial for beginners or those with straightforward strategies. Variable spreads, on the other hand, can offer lower costs under normal market conditions and are preferred by traders who can manage the risks associated with market volatility.
FAQs
What is considered a low spread at Forex brokers?
In the world of Forex trading, a spread is considered low if it’s close to 0.0 pips. However, what constitutes a ‘low’ spread can depend on the currency pair being traded. For major currency pairs like EUR/USD, a low spread is typically anything under 1 pip. For less liquid currency pairs like the minors or exotics like the USD/ZAR, spreads are usually considerably wider.
What is considered a low commission for a Forex broker account?
Commission rates can vary widely among Forex brokers, but a low commission is typically considered to be around 0.1% – 0.3% of the trade volume. In terms of fixed commissions, which are more common in ECN or STP brokers, anything around $6 – $10 per lot traded (100,000 units of currency) could be considered low.
Do some brokers offer zero-spread accounts?
Yes, some brokers offer zero-spread accounts. Zero-spread forex brokers offer trading accounts where a currency pair’s bid and ask price are the same. This means there is no difference between the bid price and the ask price of a currency pair. However, it’s essential to note that while the spread is zero, these brokers often compensate by charging a commission on trades or using other fee structures. Therefore, traders must understand the overall cost of trading, not just the spread, before choosing a broker.
Are low-spread accounts suitable for all traders?
While low-spread accounts can save costs for high-volume traders, they might not be as beneficial for less active traders. This is because the commission costs could outweigh the benefits of low spreads for traders who don’t trade frequently.
Which Forex broker has the tightest spread?
The broker with the tightest spread is not constant, as spreads fluctuate based on market conditions and the broker’s policies. However, brokers that consistently offer tight spreads often operate using an Electronic Communication Network (ECN) or Straight Through Processing (STP) model.
Can I trade Forex without a broker?
While it is technically possible to trade forex without a broker, it’s not practical for most individuals. Brokers provide access to the trading platforms and the liquidity necessary to trade efficiently in the forex market.
What’s the difference between a raw spread and a standard account?
A standard account typically includes all trading costs within the spread. This means you won’t pay a separate commission on your trades. On the other hand, a raw spread account usually offers spreads close to zero, with brokers charging a separate commission on each trade. The choice between the two often depends on the trader’s strategy and volume of trades.
Which currency pairs have the lowest spreads?
The most heavily traded pairs, such as the EUR/USD, GBP/USD and USD/JPY, normally have the lowest spreads, while an emerging-market currency paired with the USD, such as the USD/ZAR, will have a wider spread. In other words, the more liquid the market, the narrower the spread. That’s because the high volumes traded generate lots of profit for brokers, even though the profit margins might be narrow.
Forex Risk Disclaimer
Trading Forex and CFDs is not suitable for all investors as it carries a high degree of risk to your capital: 75-90% of retail investors lose money trading these products. Forex and CFD transactions involve high risk due to the following factors: Leverage, market volatility, slippage arising from a lack of liquidity, inadequate trading knowledge or experience, and a lack of regulatory protection. Traders should not deposit any money that is not considered disposable income. Regardless of how much research you have done or how confident you are in your trade, there is always a substantial risk of loss. (Learn more about these risks from the UK’s regulator, the FCA, or the Australian regulator, ASIC).
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Editorial Team
Chris Cammack
Head of Content
Chris joined the company in 2019 after ten years experience in research, editorial and design for political and financial publications. His background has given him a deep knowledge of international financial markets and the geopolitics that affects them. Chris has a keen eye for editing and a voracious appetite for financial and political current affairs. He ensures that our content across all sites meets the standards of quality and transparency that our readers expect.
Alison Heyerdahl
Senior Financial Writer
Alison joined the team as a writer in 2021. She has a medical degree with a focus on physiotherapy and a bachelor’s in psychology. However, her interest in forex trading and her love for writing led her to switch careers, and she now has over eight years experience in research and content development. She has tested and reviewed 100+ brokers and has a great understanding of the Forex trading world.
Ida Hermansen
Financial Writer
Ida joined our team as a financial writer in 2023. She has a degree in Digital Marketing and a background in content writing and SEO. In addition to her marketing and writing skills, Ida also has an interest in cryptocurrencies and blockchain networks. Her interest in crypto trading led to a wider fascination with Forex technical analysis and price movement. She continues to develop her skills and knowledge in Forex trading and keeps a close eye on which Forex brokers offer the best trading environments for new traders.
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4.61
Accepts UK Clients. Average spread EUR/USD 1.00 pips with 0.0 USD commission round turn on the trading account with lowest minimum deposit. Max leverage 30:1. Islamic account available. MT4, MT5, cTrader & TradingView platforms supported. Pepperstone is regulated by the FCA, ASIC, CySEC, SCB, CMA, BaFin and the DFSA. 75.6% of traders lose money with this provider.
