Why a Broker Spread Comparison is Essential

7th December 2020

When you get into the currency trading game there are a lot of different factors that you must evaluate before buying and selling. It starts with knowing what type of trader you want to be, the particular currencies you are interested in, and the frequency and volume of trading you want to do.

All of these things are going to affect the type of spread you are looking for in a forex broker. You can look through an Australian forex brokers list, but if you don’t understand your needs, you can choose the wrong one. Know what you require before doing a spread comparison, as it will make the process much easier.

Calculating the Spread

As a forex trader, you should understand the spread is the difference between the bid price and the asking price of the broker, measured in pips. A pip represents 0.0001 of a currency value, and this value will fluctuate throughout the day. For example, a forex broker may offer to sell you a currency pair at 1.0295 but buy it at 1.0285, with the difference being the spread.

This is where your forex broker makes their money, as they make money from the spread on every single transaction. Yet, there are factors everywhere that will cause these to fluctuate, and that is when you can either win or lose.

Low Spread 

Low spreads are going to be what the majority of currency pair traders are going to be looking for. When a pair has a low spread it means that there is going to be less risk involved and that the pair is relatively stable. This is also going to let traders know that liquidity is high, so there is the ability to get a lot of trading action quickly.

While this is going to be where most of the trading happens, it is not going to be a foolproof method for making money. Every single time you put money into these markets there is risk involved, keep that in mind when you start trading in currency pairs.

High Spread 

As you would expect, a high spread is going to be the polar opposite of a low spread in forex markets. There will be a larger difference in the bid and ask price, and this can occur for a number of different reasons. The markets could be extremely volatile, as there is no new information to base decisions on, or there could be a new currency pair emerging that is unproven.

There is an opportunity to make money in these situations, and it may be your only option if you are going for particular currency pairs. It pays to keep your wits about you playing with higher spreads, and you must go in with plenty of information.

All Brokers are Different

The average forex trader is most likely going to conduct the lowest spread forex broker comparison, as this is where most of the action will be for them, and they will deal with less risk.  If you are just getting into the game, this is going to be your best bet. Ensure that you compare each potential broker and go with the lowest spread options that work for your needs.