Compare Forex Spreads

Comparison of Spreads between Forex Brokers

There are always two prices that make up a price quote in the forex market; the bid and the ask prices. The bid price is the price at which the broker is willing to buy the currency asset from the trader, and the ask price is the price at which the dealer or broker is willing to sell the currency asset to the trader.  So if the trader is taking a long position, he will pay the ask price. If he is going short, he will pay the bid price.

The difference between the bid price and the ask price is known as the spread, and this is the broker’s compensation for the trade.

What determines the size of the spread?

The main factor is liquidity, which is a function of how much of a currency pair is traded on a given trading day. The EURUSD is the most traded currency pair, followed by the GBPUSD and the USDJPY, and the other majors follow. As such the liquidity of these currency pairs is very high and brokers can afford to keep spreads low, according to the time tested law of demand and supply.  When supply outstrips demand, costs are low.

In contrast, the exotic currency pairs are not as liquid as the major currencies. There are fewer traders and this leads to higher trade costs. It is not uncommon to see spreads in the exotic currency pairs being as high as 50 pips (e.g. the USDNOK on FXPro forex platform). However, what the exotics lack in terms of the high spreads, they make up for with much larger intra-day trading ranges.

 

 

Some brokers deliberately keep spreads as low as possible as a marketing strategy to attract more clients. These brokers are able to compensate for the reduced spread per currency with the increased number of traders they get as a result.

If you trade large sizes, you will be able to save a considerable amount of money on reduced spreads. However, reduced spread costs will have more meaning when profits are made from the trades in question.

It is also pertinent to state that some brokers who provide an ECN environment, or those who use an MT4 + ECN Bridge (FxPro) usually deploy variable spreads from different liquidity providers. This should be taken into consideration when looking for great deals on spreads.