When a slew of broker options are available, making the right choice can become a gargantuan task. It takes careful comparative analysis to choose the lowest spread forex broker that aligns with your interests and needs. Regulation, costs associated with trading, security, ease of trading and customer service, as well as commissions and spread, can all be key criteria.
The Lowest Spread Forex Brokers:
How Spreads Make a Difference in Forex Trading
Forex brokers, or the intermediaries through which you route your transactions, are compensated by spread, which is the difference between the ask and bid price. The bid and ask price are referenced from the perspective of a broker or a market maker.
Bids and Asks
The bid price is the rate at which a broker is willing to buy a currency pair, or in other words, the price at which a trader is willing to sell. The ask price is the price at which a broker sells a currency pair, or at which a trader is willing to buy. Invariably, bid price is lower than ask price.
The spread is usually denoted in pips, and is the smallest unit of price movement of a currency pair. A pip is the fourth decimal place in a currency quote.
A currency quote, which expresses the value of a currency versus another, has two components — the base currency and the quote currency. The currency mentioned first in a currency quote is called base currency and the one mentioned second is called the quote currency.
Assuming the EUR/USD pair has a bid price of 1.1363 and an ask price of 1.1365, the spread will work out to 2 pips. If you are trading a 10,000 EUR/USD lot, your total cost will be 10,000*0.0002, which equals $2.
The spread is influenced by factors such as volatility, the volume of trading and liquidity. A wider spread is indicative of high volatility, especially ahead of the release of market-sensitive news, or in the wake of some geopolitical event that has bigger ramifications for the markets. It could also be due to a lack of liquidity.
Conversely, lower spread indicates low volatility and high liquidity.
If the spread widens appreciably when you hold a position, you’re likely to receive a margin call. Therefore, it is advisable to reduce the amount of leverage used or hold your position until the spread narrows.
The spread used in forex trading can be a fixed spread or a variable spread. A fixed spread is kept constant and does vary depending on market conditions. It’s usually set by dealing companies for automatically traded accounts. A variable spread, as the name implies, varies with market conditions.
What to Look for in a Low-Spread Forex Broker
Do some careful research; a promise of low spread may not always guarantee the lowest trading cost for a forex broker. Watch for these occurrences:
- Most brokers offer different spreads for different account types. Some of these entice clients with the promise of a low spread but make up for it by charging a high commission. Therefore, ensure the pricing pitched to you includes all costs involved.
- Be watchful when a broker promises a fixed spread. It could mean either a high spread or the broker may be up to something else to make up for the difference.
- Some brokers who offer low spreads could charge a high minimum deposit.
- When you have to make a choice among the brokers offering the lowest spread, look for brokers regulated in your country. In order to avoid extra transaction charges, it is always advisable that you trade with brokers, which offer a local mode of payment.
Our Top Picks for Lowest Spread Forex Brokers
FOREX.com allows trading in over 80 currency pairs, indices, over 220 shares, commodities and cryptocurrencies.
The account types offered are standard and commission accounts. Cost of trading with a commission account is a low variable forex spread plus a flat $5 commission per standard lot chargeable at the time the trade is executed.
Typical spread for some of the major currency pairs are as follows:
- EUR-USD: 1.2 pips
- GBP-USD: 1.9 pips
- USD-JPY: 1.3 pips
- AUD-USD: 1.6 pips
easyMarkets does not charge a commission but earns out of the fixed spreads. The spreads for the EUR-USD pair can be as low as 1.2 pips, and the GBP-USD pair can have pips as low as 1.9, and these rates apply to the Super VIP account. For a Standard account, the spread could be 3 pips for the EUR-USD pair and 4 pips for the GBP-USD pair.
The different account types offered are Super VIP, VIP, Premium, and Standard, and the minimum deposit requirement ranges from $50,000 for the Super VIP account to $100 for the Standard account. Maximum leverage allowed for web trading is 1:200, and for trading through MetaTrader 4 is 1:400.
Pepperstone is an Australian online forex broker which allows trading in index CFDs, precious metals, energy and cryptocurrencies. Its standard account charges zero commission. The average spread for the EUR-USD pair is 0.16 pips, the USD/JPY is 0.25 pips and so on.
The Razor account is charged with a commission of AU$3.5 per 100,000 lot traded, and the average EUR-USD spread is 0 to 0.8 pips. The Razor account mandates an account minimum of AU$200 or its equivalent. There is no dealing desk involved, which gives traders direct market access.
Pepperstone is regulated by the U.K.’s Financial Conduct Authority (FCA) and the Australian Securities and Investments Commission (ASIC).
It offers 11 trading platforms, including MetaTrader 4 and cTrader, thereby providing the best trading software and tools on the market. A demo account is also offered so you can test out platforms and strategies.
4. IC Markets
IC Markets is also based out of Australia and allows trading in forex, bonds, stocks, commodities, cryptocurrencies, indices and futures. The firm offers 60 currency pairs and allows up to 1:500 leverage.
The average spread for IC Markets’ ECN account is 0.1 pips for the EUR-USD pair, 0.2 pips each for USD-JPY and AUD-USD pairs and 0.4 pips for GBP-USD pairs.
An ECN account facilitates using electronic communications networks for giving clients direct access to other participants in currency markets. Apart from the spread, a commission is also applicable. The MetaTrader 4 True ECN commission rates for a U.S. dollar-denominated account is $0.035 for a micro lot and $3.50 for a standard lot.
For a standard account, where only spread is applicable, the average spread for the EUR-USD pair is 1.1 pips, 1.2 pips for both USD-JPY and AUD-USD pairs and 1.4 pips for GBP-USD and 1.5 pips for USD-CAD and USD-CHF.
IC Markets provides traders access to the desktop, online and mobile versions of the MetaTrader 4 and MetaTrader 5 platforms as well as the cTrader platform. IC Markets is regulated by ASIC.
FXTM, founded in 2011, is a broker that specializes in forex, CFDs, stocks, commodities and spot metals.
Standard accounts offered by FXTM are the regular standard account, cent account, which allows trading in micro lots and through MetaTrader 4 account and shares account. It also offers ECN, ECN Zero, and FXTMPro accounts, which has different spreads and commissions.
Spreads for a standard account start from 1.3 pips and that for the cent account from 1.5 pips, while the spread for the share account could be as low as 0.1 pips.
For ECN accounts, the spread for the regular ECN account starts from 0.1 pips, while the commission works out to $2 per lot. The ECN Zero account and the FXTMPro account do not charge commissions but the spread starts from 1.5 pips and zero, respectively.
The spread offered is floating and vary depending on the time of the day and the market conditions.
FXTM is licensed by the International Finance Services Commission, or IFSC, the CySEC and the FCA. It offers a demo account as well. The margin requirement floats between 1:25 and 1:1000, and the minimum deposit requirement is $100. The firm offers both MetaTrader 4 and MetaTrader 5 platforms.
Tighter spreads give forex traders an edge over the competition. Look out for hidden costs, including commissions, rollover fees for holding overnight positions, fees for data feeds, charges for not maintaining minimum account balance, etc.
As seen earlier, along with spreads and commissions, there are other factors that should be considered in order to realize maximum returns.
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