Learn why trading Forex pairs with lowest spreads is important

There’s no professional trader that wakes up and says, I’m gonna trade that currency pair because I feel like it. Every trade should be well planned and there should be good reasons for keeping an eye on certain currencies. We only have limited time to make money per day. And that time should be spent productively.

Choosing currency pairs for your watchlist is not an easy feat. Especially for novice traders that are still trying to figure out what to trade and how. Each pair moves differently and has certain characteristics. However, one criteria to take into account when setting up your watchlist is trading fees. Some currency pairs cost more to trade than others. Spreads play the major role.

What are spreads?

In currency trading spread is a difference between a bid and an ask price. Spreads are a naturally occurring phenomenon but some brokers might have fixed spread markups charging as fees to be able to keep providing customers with financial services.

Price is born when buyers and sellers agree on the transaction. There are two major types of orders in Forex: market orders and limit orders. Limit orders only get activated when price reaches a certain point. Limit orders create the bid and the ask prices. Market orders are the type of orders that get executed at the current price and at the current moment.

Spreads are occurring naturally because we are buying currencies from one seller and selling to another. And both have different ideas about currency valuation.

In addition, on some occasions, market spreads can be 0. How can that happen? The answer is simple, when liquidity increases, meaning there are lots of buyers and sellers, trading platforms aggregate prices from various liquidity providers and offer you the best price possible.

Trading fees

As we have already mentioned, spreads are naturally occurring as we encounter different sellers and buyers. However, spreads might also be increased by your broker.

Brokers generally have trading fees and non-trading fees. Non-trading fees include:

• Deposit and withdrawal fees
• Account inactivity fees

Trading fees include: Spread markups and commission. Brokers need to have income in order to be able to continue providing you with financial services. In this regard, you can find a wide variety of brokers. Some offer minimal commissions and increase spread markups, some offer zero non-trading fees, etc. And therefore, when you are choosing a broker that offers the least fees, you should take into account all of the above and not a single stat.

Spread markups simply mean that the broker takes a portion from your trade every time you place an order. For instance, if a spread markup is 1 pip (Usually pip is the fourth decimal in a currency pair) and a price difference between bid and the ask price is 1.5 pips when you open a trade, 1 pip goes to your broker. And the 0.5 pip is the result of market price action,.which occurs naturally.

Importance of saving on fees

Choosing the lowest trading fees is extremely important in trading. It is as important as choosing a safe broker, trading platforms, and a variety of trading instruments and services offered by your broker. One or two pips might not seem significant at first glance, but as you count the number of trades at the end of the month, you realize how much you are charged. Choosing the right broker plays a major role in reducing your trading fees. However, choosing the right currency pairs to trade can also reduce your expenditure on trading significantly.

Types of currency pairs

There are many different types of currency pairs that you can trade. They are generally grouped in three categories: Major currency pairs, Minor currency pairs and Exotic currency pairs. Let’s see which group offers the least spreads and why.

Major currency pairs

Major economies that dominate the global economy represent major currencies. Major currencies such as: EUR, USD, GBP, JPY, CHF, CAD, AUD, NZD are backed by strong economies. There’s plenty of data available on them to conduct a market analysis and their prices are more stable than any other currencies. For these reasons, investors rely on major currencies, which in turn increases liquidity and makes them even more attractive for trading. When Major currencies are paired with US Dollar, we get major currency pairs. The most liquid currency pair is EUR/USD. The two of the largest reserve currencies offer the smallest spreads. In general, Majors are the lowest spread currencies in forex.

In addition to EUR/USD, all of the Major currency pairs deserve to be in your watchlists as they offer the tightest spreads. Keep in mind that some of the currencies are highly correlated with each other. For instance, GBP, EUR and CHF prices are highly correlated with each other. Whereas CAD, AUD and NZD are correlated with certain commodity prices.

The list of major currencies include:

• EUR/USD – Euro vs US Dollar
• GBP/USD – British Pound vs US Dollar
• AUD/USD – Australian Dollar vs US Dollar
• NZD/USD – New Zealand Dollar vs US Dollar
• USD/CHF – US Dollar vs Swiss Franc
• USD/JPY – US Dollar vs Japanese Yen
• USD/CAD – US Dollar vs Canadian Dollar

Minor currency pairs

Minor currencies are Major currencies but without the US Dollar as a pair. Minor currencies have less liquidity and higher spreads than Major ones. Minors are low spread forex pairs, however, spreads are not as low as in Major ones.

The list of Minor currency pairs include:

• EUR/GBP – Euro vs British pound
• EUR/JPY – Euro vs Japanese Yen
• GBP/JPY – British pound vs Japanese
• GBP/CAD – British pound vs Canadian dollar
• CHF/JPY – Swiss franc vs Japanese yen
• EUR/AUD – Euro vs Australian dollar
• NZD/JPY – New Zealand dollar vs Japanese yen

Exotic currency pairs

Exotic pairs are the least liquid and therefore have the highest spreads. Currencies that are from developing countries are called exotic. Exotic pairs might have one part of Major currency and one part of Exotic currency or both parts might be exotic ones.

Developing countries have unstable economies and as a result investors do not trust their currencies. Where there are fewer buyers and sellers on the market, the spreads are larger. Generally both professional and novice traders avoid exotic pairs to save money on spreads.

Here you can see the most popular currency pairs:

• EUR/TRY – Euro vs Turkish Lira
• USD/HKD – US Dollar vs Hong Kong Dollar
• GBP/ZAR – British Pound vs South African Rand
• AUD/MXN – Australian Dollar vs Mexican Peso
• JPY/NOK – Japanese Yen vs Norwegian Krone
• NZD/SGD – New Zealand Dollar vs Singapore Dollar

Liquidity

Liquidity plays a major role in determining the lowest spread currency pairs. In addition to currency types, liquidity changes during certain trading sessions and events.

Trading sessions

Forex market is open 24 hours a day, 5 days a week. However, not all of the trading sessions are highly active. Generally trading is divided between 4 major sessions among major financial capitals: Sydney, Tokyo, London and New York.

London and New York are the most liquid sessions and the spreads are the tightest when these sessions are active. What’s more, overlap between the two brings even higher liquidity, which takes place between: 13:00 to 18:00 GMT, 8:00 to 12:00 ET.

Market news

Market news also can significantly affect market spreads. Before major announcements such as inflation numbers, interest rates decisions, unemployment, trading deficit, etc. Markets are usually calm and less liquid. And understandably so. Would you let unpredictable news disrupt your trade? During the announcements liquidity increases and spreads become tight again.

Political processes

Political processes affect the markets the same way as economic news does. The only difference is that economic announcements are more structured.

The main takeaways

To sum everything up, saving on trading fees is important. To save fees, you can choose a broker that has the best offerings and trade low spread currency pairs. The major factor in determining how large the spreads can get is liquidity. High liquidity means that there are many participants offering large numbers of the bid and ask prices. Which translates into thigh spreads. EUR/USD has the highest liquidity and tightest spreads. In addition, major currency pairs have better spreads than minors. And minor currency pairs have lower spreads than Exotics. Markets are the most liquid during Londond and New York sessions. Market news and political processes also play a role in market liquidity and spreads.

FAQs on forex pairs with lowest spreads

What forex pairs have the lowest spread?

Major currency pairs have the lowest spreads. The most liquid currency pair is EUR/USD and therefore offers the tightest spreads. Major currencies are: EUR, USD, GBP, JPY, CHF, CAD, AUD, NZD. When paired with the US Dollar, we get a major currency pair. For example GBP/USD.

Is a low spread good in forex?

Yes. Low spread means that you are charged with low trading fees. The more you can save on fees the better. Novice and professional traders alike try to minimize their spreads by choosing a broker with small trading fees and trading Major currency pairs during highly liquid trading hours. Major pairs are the pairs with the lowest spreads.

Why are spreads so high in some currency pairs?

Spreads get high when liquidity decreases. Exotic currency pairs have the highest spreads. In an exotic pair one part or both currencies are exotic currency. Exotic currencies are coming from developing countries and therefore are more volatile. They are not backed by strong and stable economies. As a result, investors avoid trading them which contributes to even less liquidity.

Can spreads be 0?

Yes. Forex markets are not centralized. And when a broker has lots of liquidity providers, it can aggregate the best prices for you. On some occasions when you are trading major currency pairs such as EUR/USD and liquidity is high, market spreads can get as low as zero.