One of the primary trading expenses in Forex is the spread on currency pairs. Spreads often vary between brokers, and they usually add a percentage to the original spreads. Here we will discuss what Forex spreads are and which are the best zero spread account brokers.
What Does Spreads Mean?
If you are somewhat new to the trading world, understanding the wide variety of assets and indexes available can be a little confusing. Most brokers now offer a variety of products to trade. Do you want to get into Bitcoin trading? Or do you want to trade more traditional stocks or Forex?
One of the first things you need to do is get to grips with the terminology, assets, and fees involved in trading, including spreads. Spread is one of the main costs and considerations to take into account when trading Forex. Spread is basically the difference between the buy price and the sell price.
Spreads in Forex
Foreign exchange or forex trading fundamentally means exchanging one currency for another. Forex is always traded in pairs, for example, EUR/USD. The first currency in the combination is called the base or starting currency, and the second is the quote currency. When you trade Forex, you do not actually own the actual asset but rather speculate on whether a currency will rise or fall.
Using the example above EUR/USD, the spread is generally low because this pair is traded regularly and is one of the most liquid. However, a pair such as GBP/JPY, which are less frequently traded, is less liquid and will come with a much higher spread. Traders should keep in mind that the forex market is constantly fluctuating. For instance, in 2022, the Japanese yen has fallen around 20% against the dollar. On the other hand, this year, the US dollar has risen to a two-decade high.
Once you have a good handle on how currency pairs work in forex trading, next, you should look at spreads. In Forex, there are two prices needed to trade currencies, which are the buy price or the ask and the sell or bid price. The bid price is the price at which the market maker will buy the base currency, Euro, for example, in exchange for the quoted currency, USD, and the ask price is the price that the market broker will sell the base currency in exchange for the quoted currency. The difference between the buy and sell prices, known as the spread, constitutes the broker’s commission. There are two types of spreads, which are fixed and variable. As the name suggests, fixed spreads do not change, regardless of market conditions. Variable spreads, on the other hand, are totally dependent on market conditions and are constantly evolving.
Forex spread example: If a broker pays 1.13000 to buy or sell the EUR/USD currency pair. When a trader submits to buy the pair, he can offer to pay 1.13005, and if another trader wants to sell it, he can offer it at 1.13000. In both cases, the difference is 0.5 pips. Traders should keep in mind that the spread rarely deviates from the price paid by the broker. It is your part, whether you buy or sell, that determines the broker’s commission.
Zero Spread Account Brokers
Clearly, spreads are one of the main costs to take into consideration when trading Forex for that reason, it is vital to find a low spread broker. Forex brokers with raw spreads offer traders the original spreads they get from the liquidity provider. This is why these brokers offer the lowest spreads. However, they can, on the other hand, charge a fixed fee as a commission for each trade. So, which brokers have tightest spreads? Each broker has a different approach when it comes to calculating spreads, but some of the best low spread brokers include:
- FXTM: offers a great commission-based pricing
- Eightcap: provides a low minimum deposit and high leverage
- AvaTrade: offers well-regulated and trusted broker
- FP Markets: provides a great choice of trading platforms and trading tools
It is important to always carefully compare brokers, especially if you are trying to determine the spread they offer. Are you looking to diversify your portfolio? When comparing brokers, you should also take into consideration the strength of regulation and what other assets are offered, including commodities, indices, cryptocurrencies, stocks, bonds, and ETFs. Another important factor is the trading platform brokers provide, which are usually the industry standards, for example, MetaTrader 4/5.
To sum up, the total cost in Forex trading will include the spread and any commission charged by a broker. It will always be one of the most important considerations in choosing a Forex broker. Low-spread accounts are more relevant to short-term traders who trade on a daily basis. Whatever your choice of asset, taking some time to compare the best brokers is always important, but especially so when comparing spreads to ensure the lowest costs.