Forex Trading Spreads: The Key to Broker Selection

For Forex trading aficionados, cost is the most important criterion in the selection of a broker. In this regard, a good understanding of the trading spread comes to play. In case you have not noticed, majority of forex brokers earn their dough from the difference between the buy and sell orders. This difference is called the spread. It, therefore, stands to reason that brokers who offer the narrowest spreads represent the best choice cost-wise.

Newbies should, however, be aware that in the foreign exchange market, spreads may vary between currency pairs and over time. As a general rule, some brokers offer the lower spread between one pair, say EUR/USD, and the highest spread for the USD/JPY pair. Brokers typically keep the reason to themselves.

A low spread on one currency pair may not necessarily be so for other pairs. This discrepancy should always be considered if you are eyeing to trade more than one pair. Another thing to watch out for are promotional materials with fine print  Some unscrupulous brokers circulate or publish promotional literature in brochures/flyers and on the Internet that contain low spreads; but in actuality, they indicate in fine print that the spreads shown are sample spreads that may not be accurate. Do not be duped by such tactics.

Test the Waters

If you want to have a fairly good idea about the potential spreads of an online broker, opening a demo account would be a great move. Try opening a demo account for two or three currency pairs. Demo accounts are usually supplied with the same live quotes including those of spreads that actual account holders have access to. With the demo account, you will have a better idea of the spread for currency pairs you plan to actually trade later on. Additionally, you also get to observe how the spreads change over time and comparing brokers will be much easier.

Research Is Important

There is also a website called FX Intelligence where interested traders can compare broker spreads live or in real time. However, if you are after spread changes over a period of time, go for the demo account as that is not possible in this website.

Before Taking the Plunge

While spreads are of utmost importance, your research should not stop you from looking at other fees which may be charged to you. It is not enough that you are offered a low spread if the broker charges inactivity fees and other fees which are not charged by other brokers. Evaluate your options after choosing three to five brokers with the lowest spreads.