Spread is one of the most common forms of trading cost to any forex trader. However, spread can have a lot of variables that impact how much spread a trader will be paying for any given trade. Below are some methods to reduce spread and in real terms paying the lowest trading costs.
How to Reduce Spread in Forex Trading
Shop Around For a Good Broker:
This is one of the most important steps to ensuring you are paying the lowest in terms of spread. Brokers vary wildly in how much spread they “charge”. Each broker may have a different set of spread levels depending on the account type; do your homework within the brokerage even if you think you’ve found a good one. And don’t be deceived by a low spread broker who then turns around and charges you an insanely high commission. Make sure that when pricing brokers, you take into account both the the spread and the commission. When added together, the broker that seemed like it had such low spreads might be more expensive than another broker with slightly higher spreads when you factor in commission costs.
Be Wary of “Fixed Spreads”:
Brokers sometimes advertise “fixed” spreads. Keep in mind that this might be a ploy to get you to sign up for a market-maker broker (a broker that trades with you rather than passing your order into the open market – this inherently creates a conflict of interest but the subject is too lengthy for discussion here). Or it could be that they will not execute your trades if the market conditions aren’t “just right” (meaning very “mellow, stable markets”) which doesn’t happen all the time you might be interested in trading. I would, as a general rule, avoid any broker that offers fixed spreads; they are not going to sacrifice their own profits for your sake so either you are going to be locked into high spreads, or something else is going to make up the difference. Fixed spreads sound like a good idea, but they are mainly targeted against new traders who don’t know any better.
Choose High-Liquidity Pairs:
Sure, the exotic pairs might seem exciting because of the big swings they sometimes have, but the major pairs including the Eur/Usd, Gbp/Usd, Aud/Usd, Eur/Gbp, Usd/Jpy, Eur/Jpy, Aud/Jpy have the most trading volume and are most likely to have the lowest spreads. As a general rule, the more a pair is traded, the lower the spread tends to be across all brokerages.
Choose The Right Time of Day:
Knowing when the pair you want to trade is the most active (aka highest liquidity during the day) is usually the time of day that you will find the lowest spread on that pair. For example a pair like the Eur/Gbp might make some moves in the Asian session, but the spread is usually much lower during the London session because there is much more volume moving around on those currencies. Likewise a Aud, Nzd or Jpy cross might have times of day when their local markets are open that they have much lower spreads during rather than trading them late in the NY session before the Asian markets open up. Knowing when your desired pair is most active is usually a good time to reduce spread.
Avoid News Trading:
Spreads can go absolutely “off the rails” into huge numbers even on a good broker, and on a major pair if that pair is traded right before of after major news. Sometimes the news has so much impact it simply causes brokers to protect themselves by widening spreads before and after the news for a period of time. To reduce spread this way, keep an eye on your calendar every day and know when “high or moderate-impact” news might be linked to a pair you want to trade. If it is, avoid entering a position right before the news and avoid entering a position right after the news.
Reducing Spread In Forex Trading
Spreads are one of the most common trading costs when it comes to the forex market. Above are some great ways to reduce spread in forex trading and ultimately make yourself a more profitable trader by saving money when you trade.
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