When Forex trading, you are not really buying and then selling currencies. You are effectively hedging your bets on whether the values of a currency will fall or rise. When opting for a currency pair, you are expecting one currency’s price to rise compared with the falling price of the second currency. Forex brokers that offer the tightest of spreads usually offer spreads that are variable. A variable spread means that the value of the currency pairs fluctuates during the trade, meaning that the risk of loss is greater than if the spread was fixed. Generally, spreads tend to be at their tightest during active sessions of trading, where the currency liquidity is at its peak.
A spread simply means the difference between the bid price and the ask price of a currency pair that is being traded. A tight spread means that there is not much difference between the two values. This is more beneficial for the trader as it results in fewer losses and often fewer commissions and fewer fees.
Factors Affecting Spread Size
There are many factors that affect how big the bid-ask spread is. The key factor is the liquidity of the currency. This means, therefore, that the tighter the pip spread, the more traders are trading in it. The most popular pairs of currencies offer the tightest spreads whereas rarer currency pairs tend to offer larger spreads. Today, there is a lot of competition among Forex brokers and, as such, brokers tend to offer the lowest possible spread that they can.
Tightest Spread Forex Brokers List
MAS, JFSA, DIFC
How to Minimize Spreads
There are two ways of reducing the costs of spreads. Firstly, a trader could only trade during the best trading hours, when the currency liquidity is high, as mentioned above. With the number of sellers and buyers of a currency pair goes up, the demand and competition drive the market to offer narrower spreads to attract buyers.
Secondly, traders who are looking to minimize their spreads should avoid currency pairs that are traded rarely. The USD/GBP is one of the most popular and, as such, there are many brokers that compete for business by offering the tightest spreads. If a currency is traded thinly, there are likely to be fewer buyers available to trade with. This means that the spread will be wider to reflect the lack of competition.
To sum up, the tightest available spreads are those of the most popular currency trading pairs as they are the ones with the most market liquidity. If you’re looking for a tight spread, it would be wise to stick the big currencies to secure your spread or select a fixed spread account. Another way to secure tight spreads is to open an account with a zero pip spread forex broker.