Whether you are a new or experienced in trading forex, there is one thing that is unavoidable. That is the forex spread. You should try to be as aware as possible then of, what is a good spread forex wise when trading.
This will undoubtedly help you in choosing the best low spread brokers you can once you have set the standard. Here we will help you do exactly that by outlining what a good spread is, and help you find one.
Table of contents
What is a good spread forex?
The determination of what is a good forex spread will firstly depend on what you are trading. For a major currency pair, under 1 pip is generally considered good. If you are trading other pairs with less liquidity then a maximum spread of 2 pips is desirable.
Due to liquidity, you will typically always find a lower spread on more frequently traded pairs like the EUR/USD for example, than you will on other minor and exotic currency pairs. Other influential factors can include market conditions, and the broker you select.
Good spread forex: spread types
Here we will take a closer look at all the different spread types you need to know about and will have available.
High and low spreads
Of course, there will be high spreads and low spreads along the way. A high spread means there is quite a difference between the buying and selling price of an asset. There are a number of reasons why this may be the case including lack of liquidity.
For all the best information on dealing with high spreads, you should consult our guide on ‘Why is my spread so high?’ for more information.
A low spread is exactly the opposite. Here the difference between the buying and selling price is minimal. Typically, ECN/STP brokers have some of the tightest spreads that often start from 0 pips. For example, Pepperstone offers an average spread of 0.13 on pips on EUR/USD and IC Markets provides an average spread of 0.1 pips on EUR/USD. These could be great places to start for a low spread.
If you would like to find out more about the lowest spreads for trading forex then you can always check our lowest spread forex brokers top ten.
Fixed and Variable spreads
Moving on to fixed and variable spreads, as their name suggests, a fixed spread will not change regardless of the market conditions. This can make calculating your real trading costs a lot easier. They also often require less capital since they are fixed, but requotes can often happen.
Should you want to find more about fixed spreads, please read our lowest fixed spread forex brokers top ten.
Variable spreads on the other hand will change based on market conditions. This does eliminate requotes but it makes your costs and the real trading situation more unpredictable. It is typical for fixed spreads to be offered by market making brokers, while the other non-dealing desk brokers often offer variable spreads.
A negative spread can happen on occasions. This is most likely to occur with high-interest rate currencies and means you will not have to pay anything to the broker from your trade. In fact, they are giving you a guarantee of a payout in this case when spreads are negative.
Aside from a high-interest currency market, negative spreads may also be found in very highly liquid markets on rare occasions.
Forex spread: things to keep in mind
Here are a few of the key points to keep in mind about your forex spread when trading.
Forex spread: Market Maker and ECN/STP Brokers
Just because you see a low spread, it does not automatically mean you are getting the best deal. While it is true that market maker brokers usually have higher spreads and ECN/STP brokers charge lower spreads, that can start from 0 pips.
It is worth remembering that most ECN brokers also charge a commission alongside the spread, while Market Maker brokers usually, though not always, don’t attach a commission.
Forex spread: Volatility
The forex market just like any others can move frequently, and sometimes by a lot. This can be down to a host of reasons including but not limited to, economic news, events, geopolitics, natural disasters, and more.
This kind of volatility and fluctuating exchange rates can often cause a wider spread, and vice versa a wider spread can often indicate a volatile market.
Forex spread: Times during the day
The time of the day can also have a big impact on your spread. As you will know, there are several markets open for trading sessions at different times throughout the day including in Asia, Europe, and the US.
You will find that the spread will typically be higher during the Asian trading session, and definitely on certain Euro pairs simply due to lack of liquidity than it would be during the European trading hours.
If you are looking for the best spreads then, best to trade that currency during a time when the European or US markets are open since the volume will be higher and brokers will not need a wider spread to cover the position.
Good spread forex: FAQ
What is a good spread forex?
Generally, the average spreads vary from 1 to 5 pips. If the spreads are much higher then they could not be considered good. It does depend on the broker though, and the pair you are trading. Minor and exotic currency pairs will have higher spreads than major pairs.
Why can spread be so high?
There are a number of reasons why the spread could be high though the main reasons can stem from volatility in the market for any economic or other reasons, or a lack of liquidity such as at times when trading volume is not high.
How can I manage the spread?
There are several ways to optimize your position, but trading during the US & European sessions as well as trying to avoid exotic and other poorly traded currencies is a good start.
About the Author
Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world.
A trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.
He is a keen golfer with a very high handicap so when not helping you find the best broker for your needs, you may find him on the course or just as likely following any number of sports from the comfort of his sofa.