What is Spread in Forex? How to Find Low Forex Spreads Guide 2021

Samantha Forlow
2 April 2020 | Updated: 11 June 2021

Forex spreads, even if you’ve yet to trade a single forex pair, it’s likely that you’ve still heard of the ‘spread’. In its most basic form, the spread is the difference between the ‘buy’ and ‘sell’ price of a forex pair.

The spread relates to a fee that you are indirectly paying to trade, and it’s how online forex brokers make money. Quantified by the number of ‘pips’, the tighter the spread, the more beneficial it is for you as a trader.

Fancy finding out more about what the spread is and how it works? Be sure to read our comprehensive guide on What is Spread in Forex? 

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    Note: Although some forex brokers offer super-tight spreads on their major pairs, you still need to assess what the commission amounts to. It’s all good and well using a low spread broker, but it’s counter-intuitive if you’re paying a high commission.

    What is the Spread?

    In a nutshell, the spread is the difference between the ‘buy’ price of a forex pair, with that of the’sell’ price. This ensures that the forex broker in question always makes a profit – regardless of which way the markets go.

    The spread is an important talking point in the world of forex, not least because it will dictate how much you are paying to trade. In other words, the higher the spread, the more you are indirectly paying in fees.

    Before we explore how the spread is calculated in ‘pips’, let’s take a look at a basic example to clear the mist.

    1. You are trading USD/CAD
    2. Your broker is quoting a ‘buy’ price of 1.31
    3. The ‘sell’ price is 1.30
    4. This means that the difference between the buy and sell price is 0.76%

    As per the above, if you were to place a buy order on USD/CAD – meaning that you are confident on the pair increasing in price, you would pay 1.31. As soon as the order is placed, you would be in the red by 0.76%.

    Why? Well, because if you wanted to sell your position, you would need to do so at 1.30. As this is less than what you paid, the spread puts you at an immediate disadvantage as soon as you place an order. This is why it’s crucial to choose low forex spreads forex broker.

    What are Pips in Forex?

    Before we can get a full grasp of what the spread is and how it is calculated, we first need to learn about ‘pips‘. The reason for this is that in order to ascertain the width of the spread, we need to be able to quantify pricing movements in pips.

    First and foremost, when we trade forex online, we normally do so to profit off of ultra-small pricing movements. As such, most forex pairs will contain four digits after the decimal point. For example, GBP/USD might be priced at 1.3103. One of the few exceptions to this rule is USD/JPY, which only goes to two digits after the decimal.

    Nevertheless, if GBP/USD went from 1.3103 to 1.3104, this would indicate a movement of 0.0001 USD. In the world of forex terminology, this would be referred to as ‘1 pip’. Similarly, if the price of GBP/USD went from 1.3103 to 1.3098, this would be a movement of ‘5 pips’.

    Calculating the Spead in Pips

    So now that you know what the spread is, as well as how pips are calculated, we can now show you a real-world example of the spread.

    Example of Pips: Spread of EUR/USD

    Let’s say that you want to trade EUR/USD, and you’re looking to go long. As such,  you believe that EUR will outperform USD, meaning that the exchange rate will go up.

    1. The ‘buy’ price is 1.1389
    2. The ‘sell’ price is 1.1382
    3. With a difference of 7 digits, the spread is 7 pips
    4. You place a buy order at 1.1389, meaning that you need the price of EUR/USD to increase by at least 7 pips just to break even

    As you can see from the above example, even though the buy price is 1.1389, you would need the selling price to increase to 1.1389 before you can break even. Before it reaches this price, you would need to exit your trade at a lower price than what you paid.

    What About Pipettes in Forex?

    Without intending to confuse you even further, you also need to understand what ‘pipettes’ are. In a similar nature to pips, pipettes relate to the ultra-small pricing movements of a forex pair.  However, while pips are based on 4 digits after the decimal point (2 in the case of USD/JPY), pipettes utilize 5 digits.

    For example, instead of pricing GBP/USD as 1.4592 (4 digits), it might look something like 1.45927 (5 digits). As such, the movement of 1 pipette would amount to 0.00001 USD. Confused? Don’t be, as the calculation works in exactly the same way as pips, albeit, you’re adding an extra digit in.

    Example of Pipettes: Spread of GBP/USD

    In this example, we’ll look at how we would calculate the forex spreads on GBP/USD when a broker uses pipettes.

    1. The ‘buy’ price is 1.31016
    2. The ‘sell’ price is 1.31008
    3. With a difference of 8 digits, the spread is 8 pipettes
    4. You place a buy order at 1.31016, meaning that you need the price of GBP/USD to increase by at least 8 pipettes just to break even

    In the above example, the forex spreads of GBP/USD is 8 pipettes. However, although the broker in question utilizes a pipette system (5 digits after the decimal), the spread is always calculated in ‘pips’. As such, the spread would, therefore, amount to 0.8 pips.

    Note: If you’re able to find a broker that offers 0.8 pips on major forex pairs, this is super-competitive. However, be sure to check what trading commissions you’ll be required to pay!

    What Spread Should I aim for When Trading Forex?

    If you’ve read our guide up to this point, you should now be able to calculate the forex spreads in both pips and pipettes. Don’t forget, even if the broker offers 5 digits after the decimal point, we still quantify the forex spreads in pips.

    Nevertheless, we are now going to explore what sort of spreads you should be aiming for when using a forex broker.  Firstly, the width of the spread will be determined by the underlying trading pair.

    For example, major pairs like GBP/USD and EUR/USD will always have the tightest forex spreads at your chosen broker. After that, you’ll have minors like GBP/NZD, and exotic pairs like USD/TRY – which possesses the widest spreads.

    The reason for this is liquidity. While the global markets will demand trillions of pounds worth of GBP/USD on a daily basis, the likes USD/TRY will often suffer from liquidity. And what happens when markets suffer from low liquidity levels? Volatility is high. As such, the forex spreads of exotic pairs will always be significantly higher than that of the majors.

    In some cases, a number of brokers will offer a spread of zero on its major pairs. However, this is typically reserved for those with a professional trading account. Moreover, the zero forex spreads forex broker will likely offer this during standing trading hours only.

    Should I Consider Factors Other Than the Spread?

    As important as the spread is in the world of forex trading, this shouldn’t be your primary reason for joining a new broker. On the contrary, you need to look at a range of other variables. This includes regulation, the number of instruments that you can trade, and the type of payment methods it supports.

    However, in the case of keeping your costs to a minimum, a low spread doesn’t always amount to a competitively priced forex broker. Although the broker might truthfully offer some of the lowest spreads in the market, it might make up for this in other areas – such as commission, deposit fees, or overnight financing.

    Here’s what you need to look out for.

    ✔️ Trading Commission

    Most forex brokers will charge a trading commission of some sort. This is usually a small percentage of the amount that you trade. For example, if the broker charges a commission of 0.3%, and the value of your trade is £2,000, then you would pay £6 in fees. You usually need to pay a commission at both ends of the order.

    ✔️ Deposit and Withdrawals

    It’s always great when you are able to save some money on the spread. However, there’s nothing worse than choosing a low spread broker, only to find out that you will be charged to make a deposit and withdrawal. As such, check whether or not your preferred payment method comes with a transaction fee.

    ✔️ Overnight Financing

    If you’re looking to trade on leverage, you will need to be aware of overnight financing fees. This is the cost of borrowing the money from the broker, and it’s charged for every 24 hours that you keep the position open. As such, although you might be paying a super-tight spread at the broker, you might be paying for this when you apply leverage.

    Best Low Spread Forex Brokers 2021

    So now that you have a firm grasp of what the spread is, and how it will have a direct impact on your ability to make gains in the long run, we are now going to list our top 3 forex broker picks.

    These brokers offer some of the lowest spreads in the UK trading space. With that being said, just make sure that you perform additional research on the broker before signing up.

     

    1. AVATrade – 2 x $200 Forex Welcome Bonuses

    The team at AVATrade are now offering a huge 20% forex bonus of up to $10,000. This means that you will need to deposit $50,000 to get the maximum bonus allocation. Take note, you'll need to deposit a minimum of $100 to get the bonus, and your account needs to be verified before the funds are credited. In terms of withdrawing the bonus out, you'll get $1 for every 0.1 lot that you trade.

    Our Rating

    • 20% welcome bonus of upto $10,000
    • Minimum deposit $100
    • Verify your account before the bonus is credited
    75% of retail investors lose money when trading CFDs with this provider

     

    2. Capital.com – Zero Commissions and Ultra-Low Spreads

    Capital.com is an FCA-regulated online broker that offers heaps of financial instruments. All in the form of CFDs - this covers stocks, indices, commodities, and even cryptocurrencies. You will not pay a single penny in commission, and spreads are super-tight. Leverage facilities are also on offer - fully in-line with ESMA limits.

    Once again, this stands at 1:30 on majors and 1:20 on minors and exotics. If you are based outside of Europe or you are deemed to be a professional client, you will get even higher limits. Getting money into Capital.com is also a breeze - as the platform supports debit/credit cards, e-wallets, and bank account transfers. Best of all, you can get started with just 20 £/$.

    Our Rating

    • Zero commissions on all assets
    • Super-tight spreads
    • FCA regulated
    • Does not offer traditional share dealing

    82.61% of retail investors lose money when trading CFDs with this provider

     

     

    Conclusion

    In summary, if you've read our guide all of the way through, you should have a good understanding of what the spread is, how you calculate it, and why it's crucial to stick with brokers that offer 'tight' spreads. With that being said, you should never choose a new forex broker primarily on the size of the spread.

    On the contrary, the broker might be charging you in other areas of the platform. For example, this could include commissions, overnight financing, and even deposit/withdrawal fees. As such, always perform enhanced research on a broker before signing up.

    Eightcap - Regulated Platform With Tight Spreads

    Our Rating

    • Minimum deposit of just $250
    • 100% commission-free platform with tight spreads
    • Fee-free payments via debit/credit cards and e-wallets
    • Thousands of CFD markets including Forex, Shares, Commodities, and Cryptocurrencies
    Start your journey towards reaching all your financial goals right here.