BLOG Forex Brokers Why Low Spread is Important in Forex?
When choosing a forex broker, one of
the factors a trader looks for is low spreads. Most brokers today promise the
lowest spreads. Some claim to have 2 pips on major currency pairs; others swear
to have spreads as low as 0.5. The truth, however, may give away a slightly
different picture.
What is Spread?
Spread is the difference between bid price and ask price
for the currency traded and is how reputable brokers make money. The broker
adds the spread to the price of a trade and takes it later on as a fee. Basically,
you can call it commissions.
When Slippage Occurs…
First of all, a lot of brokers have slippage when executing an order. Slippage is basically a difference between the time you actually placed an order (buy/sell a currency) and the time the transaction was actually executed. During volatile market hours the exchange rate for major pair such as EUR/USD often differs from the price you wanted to place an order from the price you clicked to execute! Slippage can be as high as $0.0015, therefore the “lowest spread” becomes much higher than promised.
Increased Spreads during Volatile
Conditions
During volatile market hours, some
brokers might increase the spreads without you even noticing! It can go all the
way up to 30 pips few minutes before an important economic data release.
When do Spreads Matter?
Spreads do not
matter when you are a long-term trader who makes few trades per month. If
you are a long-term trader, the difference between a pip or two will not affect
your overall performance.
Most traders, however, are day traders and scalpers.
That’s where low spreads are considerably important and determine each trading
opportunity. Every small
change in spreads can cause serious damage to your overall daily profits.
Summary
In order to be a
successful trader, you need an effective trading plan. Your plan should include
a hunt for low spreads in order to maximize your profits.
Forex brokers do not
directly charge you a fee; however they do get money from the spreads. Adding
extra pips to a bid price, for example, means that you are paying the broker
the fee of two pips per trade. The more pips are added to the bid price, the
more costly the trade becomes for you.
Costly trade means less
profit and bigger risks. While you are breaking your head over trading strategy
and risk management, your broker cannot care less, because no matter what a
trade outcome is for you, the broker always earn its fee.
Have you ever wondered
why you start a trade with a loss and then gradually grow into profit? That’s
because your broker has already collected their fee. It is your responsibility
to find a broker that doesn’t cause you to pay more.
