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Is Choosing A Forex Broker With Tight Spread Always Good?
Today, when you surf the internet you come across loads of forex brokers who claim to be the one who offers the tightest spreads in the business. But you need to be aware and alert. All this temptation may be to lure you to your own pitfall. You need to know what the spread is before you starting looking for the smallest or tightest one.
Spread is the difference between the asking and the selling price. It is undoubtedly one of the most important concepts in forex trading as it affects your trading profits. While trading forex, you will come across a difference between the current value of the currency and the price you pay for it. This difference is actually the commission of the forex broker.
Since the broker makes his bit through spreads the wider the spread, higher is the ask price and lower the sell price. As a result, you pay more when you purchase and receive lesser amount when you sell and therefore earn less with all your trades. The forex broker with small spreads ensures a good profit opportunity for an aspiring trader.
As a trader, your task is to buy currencies at a low price and then sell them off at a higher price to make a profitable transaction. But in case of a wider spread the buying is higher and selling is lower. A half-pip lower spread may not seem much, but it does make a huge difference. Today, there are software based spread calculators are available where the spread can be easily found out and how much difference it is going to make for you in the return you get.
Having a small spread is not enough. You need to have a good execution as well. The quality of execution decides whether you actually receive tight spreads or not. Even if your forex broker has promised you a small spread but if it is with few pips to your discredit or if your request is somehow rejected, you end up receiving a wider spread than actually promised.
Ideally, your forex broker having a small spread should have the alternative of variable spread depending on your trading style. If you choose to trade only when the markets is unstable, you can accept a fixed spread, but only after confirming that the execution will be good.
While figuring out a broker, you need to learn the terms and conditions of the spread he is offering. Make sure there are no hidden costs. A good number of websites are available which make a periodic assessment of brokers. You can always take help of such sites before choosing your forex broker with small spread.
Even though moving from a 3-pip spread to a 2-pip spread may be small, and further from a 2-pip spread to a 1.8-pip spread much lesser. But in both these cases the ultimate impact on the profitability can be striking. Therefore, a forex 2 pip spread sounds like the ideal choice in a rapidly moving and changing financial market like forex.
However, if a broker is offering a spread as low as 1 pip, you need to become a little skeptical. As most of the brokers do not charge a fee or commission, more often than not they use the spread to make their earnings. In a 1 pip spread, there is not much scope for him to make profit.
So the important point of concern is not a 2 pip spread but an honest broker that will pay you the spread he quotes. The broker must be registered and must have evidence of past successes.
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