Is the low price difference in foreign exchange trading important?

The low price difference is usuallybrokerA great way to attract new customers. But do low prices really matter?

The foreign exchange industry has developed so rapidly that we have no time to adapt. As the industry evolves, the transaction process becomes simpler and the associated costs are decreasing.

More and more traders are showing interest in Forex trading, liquidity is increasing, price consolidation is now almost a common practice, brokers charge a small fee for their services, and advertise spreads as low as zero, which has become possible.

For professional traders (who naturally want to keep transaction costs as low as possible), such ads are usually attractive.

What is the price difference?

The spread, the difference between the buying and selling prices of financial instruments, is essentially the reward a broker provides to traders for accessing the market.

There is one thing as important as the spread

Spreads are costs, not trading commissions paid. However, spreads are not only related to the level of fees a broker charges for trading a particular instrument, but also to the liquidity conditions of the market.

Under normal market conditions, the bid-ask spread for a particular instrument remains stable, with the most traded currency pairs typically having the lowest spreads.

However, if there is a significant imbalance between supply and demand, the spread could widen. The same can happen when liquidity dries up or when a major market event occurs, such as a change in interest rates.

As a trader, you should look for brokers that offer low spreads. After all, spreads play an important role in trading profits, and if you are an average trader, even the smallest price difference matters.

However, there is also a but

At least one other thing is as important as the spread, and that is stable and reliable order execution.

In order to benefit from the low price differentials advertised by brokers, it is first necessary to actually see such spreads on the platform.

High-quality order execution ensures that the spreads advertised by brokers are the spreads traded by traders

Second, a trader's order must be executed at the price quoted when he clicks "Buy" or "Sell", without deviating from a few basis points.

Rapid and reliable order execution ensures (at least to the maximum extent) that what you see is what you get when you quote a trade.

This means that traders do not experience slippage or receive full quotes on a regular basis, both of which are completely normal and to be expected during periods of high market volatility. However, traders should not be frequently interrupted during normal market conditions.

In other words, high-quality order execution ensures that the spread advertised by the broker and the spread seen by the trader is the spread that the trader trades.

However, this will be difficult if the trader's order execution is delayed. Asset prices move in milliseconds, and it is virtually impossible to execute orders at the required price if the execution quality provided by the broker is poor. And while the trader's order execution price may differ from the required price by only a few basis points, the trader is trading with leverage, which maximizes the value of these basis points.

Here's an example.

Traders trade with a broker that claims a EUR-USD spread of 0.5 basis points.

This does not mean that the spread remains at this level all the time, but rather the lowest price spread that can be obtained on this currency pair, unless it is traded on a fixed spread account, and the fixed spread account also increases the spread during periods of high market volatility. Therefore, the trader logs into the trading platform and sees the following quote:

Buying price in EUR USD: 1.11525

EUR USD selling price: 1.11530

EUR/USD Spread: 0.5 basis points

Now, the trader has placed an order to buy 10 lots of EUR USD at 1.11530.

Basis point value: $100 | Spread cost: $50

In the milliseconds between the order being placed and the trade being executed, the price moved to 1.11532. The reason behind this could be the quality of the broker's execution or the lack of liquidity at the top of the order book.

Now, a slippage of 0.2 basis points may not seem like much, so the trader did not complain. The market moved in favor of the trader, the quote reached 1.11560, and the trader decided to sell 10 lots of EUR USD. Although the broker seems to have executed the trader's order in milliseconds, it has obtained 0.3 slippage, and the final execution price is 1.11557:

Set the buying price 1.11530 | Set the selling price 1.11560

Actual buying price 1.11532 | Actual selling price 1.11557

Overall, the profit is 2.5 basis points, or $250. If the order is executed at the set price, the profit will be 3 basis points, or $300.

In addition, when the broker offers a spread of 0.5 basis points, plus a slippage of 0.5 basis points, the final spread is 1 basis point. You can imagine how much the spread cost would be if the order execution price deviated by a few basis points, if the position was opened multiple times a day.

In foreign exchange trading, low-price spreads are very important, but the most important thing is the speed and possibility of execution, and the possibility of actually taking advantage of these spreads.

In fact, traders may have benefited from low spreads offered by brokers for several months, but slippage essentially translates into spreads.GTCforeign exchange

conclusion

Finally, spreads should be considered in combination with the broker's other trading conditions.

For example, let's say broker A offers a lower spread than broker B, but the latter offers traders a better trading platform, with fast and reliable execution of orders, a variety of tools, daily market analysis, and 24/7 customer service.

In this case, it is better to spend more on the spread and enjoy a better trading experience, rather than pursue the lowest spread at the expense of other benefits.