FAQs
Which broker has the lowest spreads and the best trading costs?
A number of brokers offer very low spreads, but this is not the only component of trading costs. To minimize your outlay – which is the key to making consistent profits in the forex market – you need to concentrate on which brokers offer the lowest overall trading costs. The best way to do this is using the table above.
There you will see, for example, that although IronFX charges a spread of 0.30 pips on the EUR/USD, the GBP/USD and the USD/JPY (whereas some other companies offer much lower or even zero spreads), IronFX actually has the lowest trading costs overall, at US$3 per lot (100,000 units of the base currency). FXTM, which offers zero spreads on the EUR/USD and USD/JPY, and just 0.20 on the GBP/USD, has the second-lowest overall trading costs, at US$4.88 per lot.
To see how misleading a focus on zero spreads can be, consider the case of Axi, which offers zero spreads on the EUR/USD and very narrow spreads of just 0.10 on the GBP/USD and the USD/JPY. Despite this, its overall trading costs are US$7 per lot, or more than double those of Iron FX, even though the latter’s spreads are much higher than Axi’s.
Are there any brokers that offer zero spreads?
A number of brokers offer zero spreads on all or some currency pairs. They include Vantage FX, Think Markets, FXTM, VALUTRADES, TrioMarkets and Axi. Again, however, you need to be aware that brokers will offset the lack of income from zero spreads by charging other fees, such as commissions. So, it is vital you compare the overall cost of trading between brokers, rather than choosing between those that offer zero spreads.
Are low spreads the best way of deciding which broker to choose?
Spreads play a critical role in determining a trader’s profits, so they will be among the most important considerations when choosing a broker. But that doesn’t mean you shouldn’t take other factors into account. You should also compare the overall cost of trading. Some brokers charge a fixed commission regardless of how much you trade, while others charge a fee based on trading volume (the higher the volume, the greater the commission), rather than a spread.
There are also other charges to be aware of, such as funding fees. If you close a forex position on the same day, you won’t be charged this fee, but keep it open overnight and the broker will charge a fee to cover the cost of the money that has effectively been borrowed when trading on margin. If you are trading in a currency other than your base currency (the one you opened the account with), there will be a currency conversion charge.
It is important to be aware of the hidden fees some brokers charge, such as inactivity fees, monthly or quarterly minimums, and fees associated with calling a broker on the phone. There may also be additional costs for services such as news feeds, customised technical analysis and faster connection speeds. You should take these into account when choosing a broker.
You should also take note of how well regulated the broker is. Offshore brokers may offer lower spreads but you could be taking a greater risk by dealing with one of these companies instead of an onshore broker regulated by one or even a number of highly regarded authorities. These highly-regarded authorities include the FCA, ASIC, MAS and CySEC.
Customer service is another factor. Can you trade forex 24 hours a day, five days a week, and does the broker offer round-the-clock support? Is help available instantaneously online or by phone, or do you have to wait a long time for a response? You can check by calling the broker at different times of the day before signing up. Then there is the size of the minimum deposit – some brokers may allow you to open an account with just USD 5, while others may want USD 100 or more. Leverage can also be an issue. That can vary from around 50:1 to 3000:1 with some offshore brokers.
Which currency pairs have the lowest spreads?
The most heavily traded pairs, such as the EUR/USD, GBP/USD and USD/JPY, normally have the lowest spreads, while an emerging-market currency paired with the USD, such as the USD/ZAR, will have a higher spread. In other words, the more liquid the market, the narrower the spread. That’s because the high volumes traded generate lots of profit for brokers, even though the profit margins might be narrow. These are also the most competitive currency pairs, with lots of brokers chasing customers.
Other factors, such as political and economic risk, also play a role. The currencies of countries that are politically unstable, and/or have relatively high inflation rates and a weak monetary policy regime, will tend to have high spreads to offset the higher risks involved in dealing in them.
How does commission affect the trading cost?
Various kinds of fees may be charged by forex brokers such as a fixed or variable spread, or a commission. Most brokers no longer charge commissions because of high competition among brokerages. However, those that do generally charge commission in one of two ways: by trade size or per traded lot. The first applies when a trader is buying or selling a currency pair, while the latter is charged for each traded lot, i.e. 100,000 units of the base currency.
Brokers that seek to lure customers with the promise of zero spreads often charge commissions per traded lot. These commissions will often more than offset any gains made through zero spreads. You need to be certain exactly how much you will pay when trading 100,000 units of a particular currency pair when you have a choice between a broker charging a spread and one that offers zero spreads but charges a commission per traded lot.
