Forex Brokers with the Lowest Spreads

There is a need to talk about the forex brokers with the lowest spreads because many traders do not understand how the spread affects their profitability and their trading experience.

The spread constitutes the major trading cost in retail forex trading, as trades do not carry commissions. The spread is the difference between the two prices listed in a price quote; the bid and the ask price. The spread differs from one currency pair to the other. It also differs from one asset class to the other, and it is essential to know this as forex brokers also have Contract-for-Difference contracts for numerous other assets apart from forex pairs.

When setting up a trade position, you have to factor in the spread as one of the costs you have to surmount to make a profit. If you are a scalper or trade large volumes, getting down your spreads to as low as possible is super important. Any reduction in the spread works in your favour and is a step to getting more money in your pocket.

Let us look at the concept of the spread and why you should select forex brokers with the lowest spreads for your trading.

The Concept of the Spread

Spreads are part of trading. You cannot wish them away. Your job is to ensure you get spreads that are not so high as to dent your profits significantly. How does the spread work in long and short positions?

In a long position, you are buying the asset from a counterparty. The price at which you will buy the asset is the higher of the two listed prices in the quote, also known as the ask price. This is the price at which the dealer or counterparty is willing to sell, and you have to buy at that price to complete the transaction.

In a short trade, you are selling to the counterparty. The bid price is the price at which the counterparty or dealer wants to buy from you. The bid price is the lower price in a quote and is expressed on the left-hand side.

In FX, the spread is measured in pips and is counted in multiples of one pip and the accompanying pipette that forms the tenth portion of the last decimal in a price quote. The monetary value of the spread in forex is a function of the number of pips that make up the spread and the monetary value of the pip. The lot size determines the monetary value of the pip. A Standard Lot is $100,000 units of currency. When multiplied by 1 pip, which is 0.0001 points, this gives a value of $10 per pip. A mini-lot is 1/10th of a Standard Lot, which assigns a value of $1 per pip to a currency pair based on the US Dollar. The calculation for the Japanese Yen is different, but we will use the EUR/USD as the basis of our calculation.

When you head to other assets like the US 100 CFD asset (Nasdaq 100) or gold (XAU/USD), the monetary values for a point move are different. For gold, a mini-lot is $10 per pip. This is also the same for the Nasdaq 100 e-mini contract.

The spread cost to the trader reduces when there is a smaller difference between the bid and ask prices.

What Low Spread Trading Means for a Trader

The use of forex brokers with low spreads impacts traders in the following ways:

A) Access to low spreads translates into lower trading costs, especially if you are a scalper or a heavy volume trader. Look at the numbers. If you trade 200 standard lots a month as a retail trader, a savings of even 1 pip/trade translates to a cost savings of $2,000 a month on a USD forex pair. If you trade gold, this is a cost savings of $20,000. A pip saved in spreads per trade may not look like much, but when you add it all up over a year's trading, you may find you could have used the savings as a down payment for a house!

B) Low spreads mean it takes less of a price move to get into a profitable position, assuming your trade direction is correct. This is a benefit for scalpers, allowing them to exit trades quicker as it potentially takes less time to attain profit targets.

C) Following on from point (B) above, there is also a time benefit to ending your trades faster because of attaining profit targets earlier than would have been the case with wider spreads. That time can be allocated for some other events or other trades.

D) Using forex brokers with the lowest spreads allows the trader to use improved risk-reward ratios in trades. This is a cumulative factor.

Importance of Using Forex Brokers with the Lowest Spreads

When is the spread most important to the trader? What trading situations demand the use of the lowest spreads for maximum profitability?

Trading other CFD assets that typically have wide spreads.
Scalping, which requires multiple trades on the same or several assets within a short period.
Trades on exotic pairs.

The most liquid currency pairs are the EUR/USD and GBP/USD pairs. Their high liquidity usually attracts low spreads. For traders who focus on these two currency pairs, the impact of low spreads would not be as much as those who trade the exotic currency pairs or other assets that usually come with large spreads. If you are trading gold, crude oil, platinum, or the FX pairs containing the Norwegian Krone, Swedish Krona and South African Rand, the impact of spread reduction can be huge.

Volatility can also cause spreads to widen, giving you very bad fills on your entries. The forex brokers with the lowest spreads, especially those with zero spread accounts, ensure that this does not happen so your trading costs do not balloon.

Let us look at the cost benefits of using forex brokers with the lowest spreads.

Cost Savings from Forex Brokers with the Lowest Spreads

What are the cost savings for traders who want to trade 2 Standard Lots of the gold asset (XAU/USD) if they use the forex brokers with the lowest spreads?

Let us say broker T has a spread on gold of 8 pips, and another broker V has a spread of 17 pips. What does this translate into?

Opening a Standard Lot on Broker T will cost $$80 in spreads, while the spread on Broker V is a spread of $170. If the trader opens a trade on both brokers and closes the same at similar entry and exit prices that allow for a 31-pip profit, the trader will make $120 on Broker T but only $30 on broker V.

Broker T

Sell Entry = 1720.99000: Sell Exit = 1720.68000 (Spread is 8 pips)

Another liquidity provider offers the trader pricing as follows:

Broker V

Sell Entry = 1720.99000: Sell Exit = 1720.68000 (Spread is 17 pips)

The profit for each trade is 31 pips or $310 using a Standard Lot. But when you remove the spread cost for Broker T, the trader's profit is $310 - $80 = $230.

If you remove the spread cost for Broker V, the trader's profit is $310 - $170 = $140.

This gives the trader a differential of $90 between the two brokers. Assuming the trader takes 10 such trades in a month, this will give the trader a differential of $10 X 90 or $900.

Now you can imagine if the trader trades with higher volumes or more frequently. The differential would get more prominent, which is money being thrown away anytime the trader clicks the trade execution buttons.

Conclusion

Our list of the forex brokers with the lowest spreads presents you with options. Some of these brokers have zero-spread accounts, while some have ECN platforms that are very good for scalping and other high-frequency trading methods. You can go through the list, see what they offer, and start trading with low spreads today.