When it comes to forex trading, one of the most important decisions traders will make is choosing the right broker. The broker you choose will have a significant impact on your trading success, and one of the most important factors to consider when choosing a broker is the spread they offer. The spread is the difference between the bid and ask price of a currency pair and is essentially the cost of making a trade. In this article, we’ll explore why choosing a low spread forex broker can increase your trading profits.
What is a spread?
Before we dive into the benefits of choosing a low spread forex broker, it’s important to understand what a spread is. The spread is the difference between the bid and ask price of a currency pair. The bid price is the price at which you can sell a currency pair, while the ask price is the price at which you can buy a currency pair. The spread is essentially the cost of making a trade, and it’s typically measured in pips.
For example, if the bid price for EUR/USD is 1.1000 and the ask price is 1.1005, the spread is 5 pips. This means that if you buy EUR/USD, you will pay 1.1005, but if you sell EUR/USD, you will only receive 1.1000.
Why a low spread matters
Choosing a low spread forex broker matters because it can have a significant impact on your trading profits. A low spread means that the cost of making a trade is lower, which means you can potentially make more profits on each trade.
For example, let’s say you buy EUR/USD at 1.1005 and sell it at 1.1010. If the spread is 5 pips, you would break even on the trade because you would be buying at the ask price and selling at the bid price, which is 5 pips lower. However, if the spread is only 1 pip, you would make a profit of 4 pips on the trade, which is a 80% increase in profit.
In addition to potentially increasing your profits on each trade, a low spread can also make it easier to trade profitably in the long run. This is because a low spread allows you to enter and exit trades more easily and at a better price, which means you can potentially make more trades and take advantage of more trading opportunities.
How to choose a low spread forex broker
Choosing a low spread forex broker is an important step in maximizing your trading profits, but it’s not always easy to find a broker that offers low spreads. Here are some tips to help you choose a low spread forex broker:
1. Compare spreads: The first step is to compare the spreads offered by different brokers. Most brokers will list their spreads on their website, and you can also use third-party websites to compare spreads across multiple brokers.
2. Look for variable spreads: Some brokers offer fixed spreads, which means the spread is always the same regardless of market conditions. Variable spreads, on the other hand, can change depending on market conditions, which means you may be able to take advantage of lower spreads during times of low volatility.
3. Consider commission-based accounts: Some brokers offer commission-based accounts, which means you pay a commission per trade instead of a spread. This can be a good option if you trade frequently or if you prefer to have more transparency in your trading costs.
4. Check for hidden fees: Some brokers may offer low spreads but charge hidden fees or mark up the price of trades in other ways. Make sure to read the fine print and check for any hidden fees before choosing a broker.
In conclusion, choosing a low spread forex broker can increase your trading profits by reducing the cost of making trades and making it easier to enter and exit trades at a better price. When choosing a broker, make sure to compare spreads, consider variable spreads and commission-based accounts, and check for any hidden fees. By choosing a low spread forex broker, you can potentially increase your trading profits and achieve greater success in the forex markets.