--News Direct--
In the forex market, the dealing spread represents the difference between the bid and the offer exchange rate for a currency pair. Dealing spreads are the main source of income for online forex brokers that do not charge per-trade commissions, and some brokers offer tighter dealing spreads than others.
A forex broker with low-spread parameters helps you maximize trading gains by keeping your costs down. Given the number of online broker choices available to retail forex traders today, finding the right low-spread forex broker that meets all your requirements might take some research.
Low dealing spreads can make a big difference to your bottom line as a forex trader, especially if you trade frequently and in high volume. Wider dealing spreads can eat into your profits and magnify losses, so you’ll want to select a broker with the tightest spreads on the currency pair or pairs you’re trading that still meets your other trading needs.
Read on for more information about low-spread forex brokers and how to select a good one.
What Is a Low-Spread Forex Broker?
A low-spread forex broker provides its clients with very tight dealing spreads on currency pairs. Some of the dealing spreads shown by low-spread brokers can be a fraction of a pip, and even no-spread quotes can occasionally be seen where the bid and offer exchange rates are equal.
Since most forex brokers do not charge a per-trade commission, they typically make their money by quoting a bid/offer exchange rate spread on currency pairs to their clients. This dealing spread is generally a bit wider than the spread quoted in the professional Interbank market.
A market-making forex broker will make its own quotes for currency pairs and take the other side of its customers’ trades. Other forex brokers use the electronic communication network (ECN) model instead, which lets them obtain the best dealing spread from among a network of market makers and route any orders their clients place directly to the market maker with the best exchange rate.
Low-spread brokers are those that offer very tight dealing spreads whether they operate as market makers or use the ECN model. Also, some low-spread brokers and most zero-spread brokers make their money on commissions rather than dealing spreads, so check out the total dealing cost picture at a broker given your preferred trading strategy before opening an account with them.
Keep in mind when comparing the dealing spreads among different brokers that the tightest dealing spreads tend to be seen in the most liquid currency pairs such as the EU euro versus the U.S. dollar (EUR/USD). Less-liquid currency pairs like the U.S. dollar versus the Mexican peso (USD/MXN) commonly display wider dealing spreads.
Advantages of Low-Spread Accounts
Having a low-spread broker account has some significant benefits for forex traders. Here are some of them:
Keeps trading costs down: Probably the biggest advantage of trading through a low-spread account is that the tight dealing spreads can save you a significant amount on upfront trading costs the higher the number and volume of your trades. A broker that offers wider dealing spreads can considerably boost your trading costs, which can eat into your profits if you trade often.
Commissions: Some forex brokers that advertise low dealing spreads do not charge per-trade commissions, but some do. Check to see if any trade commissions will apply to your forex transactions before opening an account.
Trade through an ECN account: A broker that gives you access to an ECN essentially connects you directly to market makers in the professional Interbank forex market to find the best exchange rate to fill your order. Since the ECN monitors quotes from a group of market makers, you can take advantage of the increased liquidity and generally tighter dealing spreads that result. While ECN accounts may offer tighter spreads, many brokers that offer this option charge an additional commission or ask for a higher minimum deposit.
Best for short-term trading strategies: Traders who scalp the market or day trade actively can usually benefit considerably from using a low-spread broker. Since these types of strategies typically involve making a larger volume of trades, low dealing spreads can help generate bigger trading profits.
Disadvantages of Low-Spread Accounts
Some downsides do exist to having a low-spread broker account. Here’s a short list:
Per-lot commission: While low-spread brokers may or may not charge commissions in addition to the dealing spread, zero-spread brokers typically charge a per-trade commission ranging between $3 to $10 for each lot traded. Some zero-spread brokers do advertise that their commission rates are “negotiable”, however.
Limited research offerings: Many low-spread forex brokers help keep their costs down by eliminating research resources, proprietary trading tools and other features. When reviewing low-spread forex brokers, you should check out their trading platform to make sure it will suffice for your needs. A decent low-spread broker should at least support the MetaTrader 4 and 5 platforms or a comparable proprietary trading platform.
Possible high minimum deposit: While some zero-spread brokers will let you open an account with as little as $10, that deposit might not get you very far if they also charge $10 per trade for their zero-spread account. Other low- or zero-spread brokers might ask for a large initial deposit, although many brokers will let you open an account with a minimum deposit of between $100 and $500.
Inactivity fees: If you open a low-spread account and deposit funds but don’t make any trades for some time, many brokers will assess an inactivity fee. This fee varies in size and what amount of inactive time triggers it among brokers. For example, some brokers will charge a $50 fee per quarter after three months of inactivity.
6 Things to Consider when Choosing a Low-Spread Forex Broker
A broker that features low or even zero dealing spreads will not always be the best choice for you, since any broker you select should be reputable and well-regulated. Also, your trading style and individual needs will determine the amount of importance dealing spreads make to your bottom line. Below, you can find six other important factors to consider when choosing a low-spread forex broker.
Commissions per Trade
Most brokers that will allow you to open a zero-spread account also charge a per-trade commission. Brokers that offer ECN accounts will often charge a commission per trade on top of the dealing spread.
Per-trade commissions vary from broker to broker, with zero-spread brokers usually charging a higher commission than low-spread brokers. Some forex brokers do not publish their per-trade commission rates for a zero-spread account and ask to be contacted for a quote instead.
Dealing Spreads
Dealing spreads can vary considerably among forex brokers. Low-spread forex brokers might show a spread of 1 pip or less for the EUR/USD currency pair, while zero-spread brokers charge no dealing spread at all.
Dealing spreads can also vary among currency pairs because of liquidity variations, as well as from the different dollar values of a pip for each pair. While the highly liquid EUR/USD currency pair might be trading at a 1 pip dealing spread, a quote for the less-active EU euro versus the Turkish lira (EUR/TRY) pair might be 20 pips wide.
Market volatility also plays a major role in how wide forex market makers quote dealing spreads. For example, if the U.S. Federal Reserve has just announced a higher-than-expected benchmark interest rate rise, this surprise event would prompt significant forex market volatility that in turn causes market makers to widen their dealing spreads.
Economic data releases and geopolitical news can also significantly impact exchange rates by making markets choppy and difficult to anticipate. During normal market conditions where exchange rates move in a more orderly manner, however, Interbank dealing spreads tend to remain quite narrow for the major currency pairs.
Trading Platforms
Having access to an excellent forex trading platform can make a big difference to your bottom line when trading currencies. A suitable trading platform should be easy to use and include technical and fundamental analysis tools, the ability to trade directly from charts, market alert functionality and a way to automate a trading strategy.
A good low-spread forex broker should support the MetaTrader 4 or 5 trading platforms that have become the standard for retail forex traders or a platform of roughly equivalent functionality. Some low-spread forex brokers also offer their own proprietary trading platforms that you should evaluate before opening an account if they do not support MetaTrader.
Many low-spread forex brokers offer a demo account that lets you gauge their services and platform before funding a live account, so don’t hesitate to take advantage of that opportunity if available.
Regulations
Any low-spread broker worth opening an account with should be strictly regulated, ideally by an agency situated in a major jurisdiction. If you select a forex broker regulated in the country where you reside, then you will usually enjoy better legal recourse in case a problem arises.
Respectable forex broker regulators include the Financial Conduct Authority (FCA) in the U.K., the Australian Securities and Investments Commission (ASIC) in Australia, the Financial Market Supervisory Authority (FINMA) in Switzerland and the National Futures Association (NFA) and Commodities Futures Trading Commission (CFTC) that serve as joint U.S. regulators.
Other secondary regulatory agencies, especially those based in offshore locations, may not provide the oversight necessary to offer forex traders sufficient security or recourse in the event of a dispute. Such secondary regulators would include those based in Belize, the U.K. Virgin Islands, Mauritius and Vanuatu.
Security
Security starts with a broker having oversight from a reputable regulator. You will probably also want to have a broker that requires you to access your account using a two-factor authentication (2FA) method that can protect against unauthorized access. Many forex brokers have adopted more secure log-in systems that require a personal identification number (PIN) in addition to a password.
It also makes sense to use a broker that segregates your funds from theirs. This means that if the broker goes bankrupt, your deposited money is kept separate and safe from the broker’s creditors.
An additional important security measure is negative balance protection. This account feature prevents you from losing more money than you deposited in case of an unanticipated adverse market move.
Currency Pairs Offered
In general, the more liquid a currency pair, the tighter its dealing spread. The major U.S. dollar currency pairs typically have more liquidity than minor and exotic pairs and most cross-currency pairs that do not include the U.S. dollar.
When dealing in exchange rates that don’t include the U.S. dollar, dealing spreads tend to widen for cross-rates and exotic currency pairs. If you trade in a normal forex account, dealing spreads can widen considerably, while a zero-spread account could save you on overall costs in the long run.
Many low-spread and zero-spread brokers offer only certain currency pairs because of the difficulty in offsetting their risk. Pairs with the highest liquidity tend to be favored, so if you plan to trade less-liquid pairs, you might be better off with a regular forex account.
Is it Worth Trading Through a Low-Spread Broker?
Low-spread and zero-spread brokers can definitely reduce your trading costs, but they tend to skimp on their other offerings, so you will want to thoroughly check out their services before opening a live account to make sure they are adequate for your needs.
Testing out a new forex broker by trading in a demo account for a while can give you a good idea of their trading platform and dealing spreads. You can generally also take that opportunity to look over the broker’s other offerings like research and educational resources before you deposit funds and start trading in a live account.
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.
Contact Details
CedarFX
+1 877-440-9464
Company Website
View source version on newsdirect.com: https://newsdirect.com/news/how-to-choose-a-low-spread-forex-broker-424848146
