Lowest Spread Forex Broker

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Most people would agree that choosing a Forex broker with the narrowest spread is good idea since the narrower the spread the more profit you’ll make. In theory that’s correct, but before you run off and look for the lowest spread Forex broker there are a few things you need to know.

First of all there are two different kinds of Forex broker; there’s the standard retail broker that you’re no doubt aware of, companies like Zecco and eToro are good examples of retail brokers.

Retail brokers make their money on the spread; they effectively create a virtual market of Forex minis which have much higher spreads than traditional Forex trades. The trades you make within this market are then hedged on the full Forex market using Interbank.

The advantages to this are that you can trade much smaller amounts. The disadvantage is the spread is much wider than on traditional Forex trades. Retail brokers usually have a spread of 1-2 pips on major currency pairs whilst the traditional market will typically have a spread of 0.2 pips on major currencies.

The second kind of broker is an ECN broker; ECN brokers trade directly with interbank, when you place a trade with an ECN broker he is merely acting as a middleman and passing the trade on through Interbank, he makes his money by charging a small commission for doing so. This means you get very narrow spreads and can utilize more advanced strategies like scalping.

The downside is you need a substantial amount of money to trade direct. Minimum of $7 per pip which means you’ll need to deposit around $10,000 assuming proper money management is in place, just to trade one currency pair.

So if you’re looking for a broker with the narrowest spread the answer is always going to be choose an ECN broker. But what if you don’t have enough money to trade direct? Then you might be tempted to look for a retail broker that offers the narrowest spreads.

But that opens up a whole new can of worms, because retail brokers control their own virtual markets they also control the spread. That means during busy periods they can manipulate the spread accordingly. It’s not uncommon for some unscrupulous retail brokers to widen the spread to 6 or even 9 pips during volatile periods of trading.

So looking for a retail broker with the narrowest spread is not necessarily cost effective. It’s much better to choose a reliable broker with more consistent spreads throughout the day, that way you won’t get penalized too much during busy periods or when a major news announcement is due.

On top of that brokers that offer extremely narrow spreads also tend to offer extremely high leverage, the combination of high leverage and narrow spreads is a toxic one and you should avoid a broker that promotes its business this way.

Brokers like this aim to leverage you to the max, wait until you’ve lost your deposit and bank all your money. They have no interest in teaching you how to trade properly, they won’t hedge your trades on the real currency market and they won’t care if you’ve lost all your savings in the process.

So be careful when searching for a Forex broker, take a look at our list of our recommended Forex brokers and make an informed decision based on the amount of money you have to invest and your level of experience. With a little research and dedication you can easily succeed in the Forex market, but the first thing to get right is your broker.

Here’s a list of typical spreads from eight of the top Forex brokers, there’s a mix of ECN and retail brokers in this list so you can easily see the difference in spreads.

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