This means that the higher the spread, the more you are paying to buy currencies and the less you are getting back in profits when you sell those same currencies back to the market maker. This is how so-called “commission-free” forex brokers tend to make their money. Such brokers will set the spreads themselves, based on various market factors.
Since the spread constitutes the difference between the actual market price of a currency and what the broker is listing the price as, this difference can be pocketed as profit. Therefore, it is beneficial to know how to get the lowest spreads possible on all of your forex trades. That’s where we come in. Read on to find out everything you need to know about low spreads in forex trading, as well as how to find the best low spread brokers for you.
What Is Low Spread?
As we have covered, the spread is the difference between the current buy and sell prices of a currency pair, as listed by a broker. It can be considered as a “price” paid by traders to buy a currency, as the spread is added to the market price by a broker as a form of commission. The buy price of a currency (known as the ask price) is always going to be lower than the sell price (known as the bid price), with the true market price lying somewhere between the two.
The spread charged by brokers tends to be very small on the surface of things, often amounting to just a few pips, or a fraction of a percentage of the value of the currency unit. However, spreads can easily add up to significant operating costs for traders, especially if they are trading on margin and open up very large forex trading positions.
That’s why it is always good practice to choose a forex broker that offers low spreads, as this will make the cost of doing business substantially lower. A low spread is simply a lower price difference between the bid and the ask price of a currency pair.
The lower the spread, the less money is being creamed off the top for the broker, meaning that you are paying closer to the actual market price for a currency pair. Always use a trusted forex broker review site such as ours to find honest evaluations of the spreads charged by licensed UK brokers, as this will help to protect your bottom line.
The Benefits of a Low Spread Broker
The most obvious benefit of using a low spread broker is the reduction in up-front costs. Since spread can be thought of as a form of commission charged by forex brokers, lower spreads translate to lower prices for you. In addition, low spread brokers offer a more direct form of trading, as a lower spread means that the prices being quoted are closer to the true market price of a currency pair.
A low spread broker tends to make it easier to calculate the potential profits and losses from each trade that you place, allowing you to pursue a more informed trading strategy. If you are a day trader that tends to make money from numerous incremental price movements in currency pairs, lower spreads are definitely something that should be prioritised.
The Risks with a Low Spread Broker
That being said, that are some risks that come with choosing a low spread broker. For one, spreads are meant to take account of liquidity in forex markets. Liquidity is the access that you might have to a particular currency due to market supply and demand.
For example, major currencies that are traded a lot such as USD and GBP tend to have very high liquidity, meaning that you will be able to buy and sell them whenever you want for the exact price that you see. Meanwhile, more niche currencies such as NZD or HKD have less liquidity, meaning it can be harder to access them at certain times.
Less liquid currency pairs tend to have higher spreads, as the cost of facilitating such trades is higher to the broker. If spreads are low on even the most niche currencies, you have to wonder how a broker is making money. Remember, focusing exclusively on spreads is risky as you may lose sight of the other ways that a broker is making money from you – ways that can often be much more expensive for you than spreads.
How to Trade with a Low Spread Broker
Once you have found the low spread brokers that offer the pips you are looking for, it’s time to start trading. First, you would need to find a forex pair that you wish to open a position on. You would then need to take into account the difference between the buy and sell price and factor this into your investment. The reason being that this will give you a clear idea of how much profit you stand to make if the price movement of the currency pair goes in the direction that you want it to.
Let’s walk through a quick example to better understand why low spread brokers are preferable to those with higher spreads. Let’s say you wish to trade EUR/USD. Your broker is offering a bid price of 1.0661 and an ask price of 1.0664.
The spread here is therefore 3 pips. If you were to buy EUR/USD and attempt to sell it straight back to the broker, you would immediately be in the red, due to this 3-pip difference. You would therefore need EUR/USD to appreciate by at least 4 pips before you could sell and make any profit. Low pips mean lower barriers to profitability.
If you are concerned about shoring up your bottom line and ensuring that you pay a fair market price for all of your forex trades, you need low spread brokers. Fortunately, we have got you covered. We only feature trusted, fully licensed UK brokers that offer true value for money. With that in mind, here are some of the top low spread brokers that you can use right now:
AvaTrade is committed to ensuring that traders face the fewest barriers to entry and the lowest costs. That’s why they do not charge any commission on any of the trades you can execute on their platform. In addition, AvaTrade offers ultra-competitive spreads, with an average spread rate of just 0.9 pips across all forex markets. Furthermore, you only need a deposit of £100 to open your account with AvaTrade.
Skilling is a sleek and user-friendly platform that specialises in forex trading, although a range of other assets and commodities are also offered. Skilling offers all users market access to more than 70 different base currencies, as well as more than a dozen crypto CFDs. For all of this, you can expect to pay an average spread rate of just 0.1 pips – arguably one of the lowest we have ever seen.
eToro has taken the world by storm in recent years, rising through the ranks to become quite possibly the most popular forex broker on the planet. As such, it should come as no surprise that eToro offers competitive and low spreads, ranging from 0-9 to 2.5 pips. In addition, eToro members can enjoy some of the most extensive copy trading options in the business, as well as exclusive access to a huge variety of CFDs.
EasyMarkets believes that what traders really want is choice. As such, they have introduced 135 currency pairs for you to trade on, as well as 191 additional instruments such as CFDs. The average spreads offered by EasyMarkets are not the most generous, but spreads on the most popular currency pairs are possibly the lowest around. Traders can take advantage of incredibly tight spreads on major pairs such as USD/EUR, where spreads are only 0.1 pips a pop!
Use a Trusted US Forex Broker
While low spreads are important for profits and trading success, it is equally important to have a qualified, licensed forex broker that you know you can trust. For this, make sure to take advantage of the reliable, up-to-date information on offer by consulting our expert broker review pages with honest insights on the top forex brokers in the US right now.