For a long time, many believe that in forex trading, low spread is good. Until recently, many traders have sent me emails to ask “Is low spread good?”. To help people get the most benefits from spreads, I am writing this article to carefully explain to you about what low spread really means.
It is spread which makes the Bid price and the Ask price different. Spread is the trading fee you pay for your brokers. Spread mainly decides your trading cost. People see brokers with high spreads are brokers with high trading cost. That is the reason why low spread brokers are favorable for traders. By reading this article, you can know more about low spreads.
Who needs low spreads?
Scalpers and long-term traders are two types for traders. Forex traders who keep their positions open for less than a day are scalpers. On the other hand, traders who have their positions opened really long, even up to a month, are called long-term traders.
Spreads are their main transaction costs to them, because they open many positions in a short time. Moreover, they mainly earn only a small number of pips for every order, so low spread will bring them more profits.
They keep their positions open for longer, so that they can earn up to hundreds of pips per position. Long-term traders only pay a maximum of 2% of their profit for spreads, so they don’t care much about spreads. However, the positions of long-term investor will be kept for months, so they are mainly charged the sway as main transaction cost. Therefore, long-term traders only want to do business with low swap brokers.
Who needs what?
In conclusion, check your trading style to know what type of trader you are. You should aim for low spread if you’re a scalper. If you’re a long-term trader, look for brokers who have low swap rate.
Low spread is good, but not the best
Again, only if you are scalpers, low spread is a perfect choice for you.
However, spread is not the only thing that decides whether a broker is good or not. There are several other factors that add up to that. You have to make sure that your broker satisfy all below criteria:
- Regulation: The broker must have forex regulations from your country. If your country doesn’t have a forex regulation, choose a reliable broker.
- Local payment methods: When trading with the brokers not having local payment methods, traders can only deposit or withdraw by Visa, Credit card, Neteller, or Skrill. Furthermore, you will be charged 2 – 4% of your total deposit amount as the fee for those deposit/withdrawal methods. Therefore, you should not choose the brokers who don’t have local payment system.
- Low commission
- Good local supports
What makes Spread and Commission different?
We can list down 2 types of forex account that all brokers have: Regular and ECN. The spreads of regular accounts are higher than that of ECN accounts, because the spread of ECN is always nearly zero. For regular accounts, brokers will add the transaction fee (spread) to those quotes (a process called Mash Up), when they get quotes from liquidity providers. By contrast, ECN accounts will provide the exact quotes offered by liquidity providers. Consequently, brokers then have to charge commission as it is their main income.
The differences are:
– Spreads are the main income of brokers when you trade regular accounts.
– Commission is the main income of brokers when you trade ECN accounts. When you do business with ECN brokers, you actually will be charged both commission and spread, but those spreads are nearly zero. You mainly pay for the commission.
So the answer for your question “Is low spread good?” is yes, only when your trading style needs low spread.
Synthesized by top4forexbrokers.net