By: Charley Warady

Just like you've seen in any newspaper ad during any holiday season for any electronics store anywhere. They all guarantee the lowest prices anywhere. The same is true for many retail Forex brokers. They always talk about the lowest Forex spreads.

If a price of a currency is a price of a currency, then theoretically there should be no difference between the spread prices between brokers. They should all have the lowest Forex spreads. But that's not true and it is a definite consideration when any trader is shopping for a Forex broker.

Why a spread

Forex brokers don't make their money on commission. They may make a big deal about their zero commission offering, but they all do the same thing so it's no great bargain. That's not where their bread and butter is. They make their money on the spread. The spread is the difference between the bid price and the ask price for the currency being traded. The broker adds this spread onto the price of the trade and keeps it as their fee for trading. So you can consider this as a hidden commission.

When brokers offer the lowest Forex spreads, they are often talking about the most commonly traded pairs; for instance, the EUR/USD. The less commonly traded pairs often have a wider spread because the volume is less.

Making a difference

Some traders don't care about the spread and for a broker that offers the lowest Forex spreads may not be a selling point. If a Forex trader is a long term trader, the difference between a pip or two isn't an attraction to sway their business. Most traders aren't long term traders. Most traders are day traders, and several of them are scalpers. When you're going for a ten pip profit, you want all ten pips in that profit. When you're a scalper and snatching out two and three pips at a time, the size of the spread can determine your entire profit.

One good thing about the spread is you pay it when you buy and not when you sell. A trading of 4 pips vs. 5 pips makes a difference of 25% on your trading costs. This makes the point clear why you would need a low spread Forex trading platform. When searching for the broker who offers the lowest Forex spreads, make sure it's being offered in the kind of account you're using. The spread might be different when you're dealing with a mini account, for instance.

Trader beware

Always read the fine print when it comes to the spread being offered by any broker. Make sure it fits your needs in the style of trading you're planning or that to which you are accustomed. You don't want them hiding their higher spreads with bells and whistles like “free cash” or “cash back.” These deals sound great, but if you're planning to trade often, or even a few times, a day the size of the spread makes more of a difference than the cash they're offering you. By the way, the cash always has strings attached, also. You should do some more fine print reading as far as that's concerned, too.

Don't let the broker take money from you unnecessarily. Find out the lowest Forex spreads and begin there. It's a good place to start.