Best Low Spread Forex Brokers 2021
On any trading platform, there are two prices for each financial instrument – the bid and ask price. When buying or going long, traders use the asking price. When selling or going short, they use the bid price.
The difference between the two prices (bid and ask) represents the spread. It is a source of income for the broker (fee), thus a cost for the trader. Therefore, the lower the spread, the better for the trader.
Low Spread Forex Brokers
Variable vs Fixed Spread Trading
The table below explains the main differences between variable spreads offered by ECN brokers and fixed spreads offered by a traditional dealing desk broker.
Not all brokers who offer variable spreads provide ECN platforms: continue by learning the difference between ECN, STP and Dealing Desk brokers
|Features||Variable Spreads ECN platform||Fixed Spread Dealer platform||Commentary|
|Better Prices||YES||NO||ECN platform allows traders to get better price quotes, and often be able to trade inside the pip. Such variable spreads can be as low as 0 at times.|
|Trading on Interbank and between traders||YES||NO||Unlike fixed spreads from a dealing desk broker, variable spreads from ECN broker provide maximum flexibility: a trader can deal on prices streamed directly from participating banks as well as a deal on prices entered by other traders. Competitive bids/offers create a base for better quotes.|
|Instant trading without re-quotes||YES||NO||Traders trading on the ECN platform doesn’t get re-quotes. The platform technology uses a strict price+time dealing protocol which ensures that trading positions are filled at the price seen on the screen.|
What Is a Spread?
The difference between the bid and ask is 0.5 pips or half a pip, as the image shows. Depending on the volume traded, it has a different value for each trade.
For instance, when trading 0.1 lots on the EURUSD pair, a one pip profit roughly translates into $1. Hence, half a pip spread cost represents $0.5 on a 0.1 lot trade. Note that the spread doesn’t increase with the number of pips gained. It remains constant and is paid regardless of the trader makes a profit or not.
How Does a Broker Determine Its Spreads?
The liquidity provider determines the spreads. The more liquidity providers, the more competitive the spreads become, especially during illiquid market moments.
There are different types of brokers, and the way they are organized influences the spreads they offer. For instance, Some brokers offer fixed spreads but don’t be fooled into thinking that’s the only cost, because in this case, typically, other commissions and hidden fees exist.
In any case, the spread is one of the primary income sources for the broker and sits at the heart of its operation.
Therefore, it is essential to be aware of the brokers offering the lowest spreads possible without adding an extra fee and hidden commissions.
Low Spread Trading – How Will Low Spreads Benefit Your P/L
Coping with spreads can be a struggle for the retail trader. Retail traders, especially new traders sometimes trade via scalping. This is opening and quickly closing trades for immediate returns.
Imagine you have a trading strategy that targets ten pips for every trade. If the spread is one or two pips, that’s ten or twenty per cent of the cost. Add to it the commissions and other associated costs, and the strategy isn’t so profitable anymore.
On top of that, spreads widen during critical economic releases and during illiquid times. In high volatility environments, spreads increase, and it is easier to have the stop loss hit. Therefore, is not only important to choose a low spreads broker, but one that has tight spreads during all moments in a trading day, not only when the market is calm.
Choosing a Low Spread Broker
Most brokers offer the tightest spreads on the most popular pairs (e.g., EURUSD) but then wider ones in markets with lower liquidity. The comparison tables provided here should be of great help in finding the desired broker to trade with.
Fixed vs Variable Spreads
As the name suggests, fixed spreads do not change. However, this comes at an increased cost, as they are always wider than variable spreads.
A news trader may favour fixed spreads despite being wider. It is a guarantee offered by the broker that it’ll execute the orders no matter what. But a swing trader and especially a technical trader benefits the most from variable spreads and direct execution, despite paying more to get in or out of the market.
Why Spreads Increase?
When the market moves fast, spreads increase. It happens during economic releases or other market-related news that creates volatility.
During increased market volatility variable spreads will widen for all dealing desk brokers, which means a trader won’t get the lowest spreads advertised by a Forex broker.
However, with ECN brokers clients will have actually lower spreads when activity in the market rises and trading volume increases – during those times variable spreads can drop to 1/10 of a pip = 0.1 pip and even be quoted at zero.
(With dealing desk brokers variable spreads never drop below the advertised point, they can only rise.)
Fixed spreads, although called “fixed”, can also be subject to change.
There are brokers who offer Fixed Guaranteed spreads – such spreads don’t change no matter what.
All other brokers offer Fixed-with-Exception spreads (often marked with stars*) – these are the spreads that can change should the market become extremely volatile, for example, during important news announcements, such as Non-Farm Payroll, Unemployment Rate, Consumer Price Index, Retail Sales, Interest rates etc. During other trading hours, spreads remain fixed.
Also, traders should note the common practice of widening spreads during weekends, as well as for some Forex brokers – during night hours from Monday to Friday.
Traders should pick the broker offering the lowest spreads possible. However, the best broker is not always the one offering the lowest possible spreads. When choosing a broker, look for the combination of lower spreads, fair execution (this includes risk management tools like stop losses and take profit orders), little or no commissions, and no hidden costs.
Which broker to choose: with fixed or variable spreads?
It depends on the trading strategy. Forex fixed spreads are wider but guaranteed, while variable spreads tighten during calm markets and widen significantly in volatile markets.
Are spreads the same on all currency pairs?
Is there a broker with 0 spreads?
Yes. But be aware that the broker must charge from other sources, and the trader ends up paying more.
What conditions to look for when choosing a low spread broker?
Multiple liquidity providers, variable spreads broker.
For more brokers of different trading conditions, we’ve pulled together the best brokers for each: