When it comes to Forex Trading, the concept of Spreads plays a crucial role in determining profits. The term Spread refers to the price difference between where a trader chooses to buy and where it sells an underlying asset.
Traders must part with a small amount of money if they want to sell a currency immediately after buying it. In the forex market, the buying and selling of currency is facilitated by Market Makers. The Market Makers are responsible for ensuring organized movement of buy and sell orders and are always dealing with some amount of risk. Let’s consider an example to understand this better. Let’s say a Money Maker accepted a buy order at a specific price. However, by the time they found a seller, the value of the agreed currency haD already gone up. In this case, the Money Maker will be responsible for matching the difference between the buy order and the sell order. Thus, to minimize the risk involved, the Market Makers keep a part of every transaction. This part that the Money Makers is called the Spread.
To understand which currency pairs are more profitable, it is crucial to design a baseline. Most Forex traders decide this baseline by converting the Spread to a percentage of the daily range. This exercise allows traders to successfully understand the pip potential for a day trade with reference to spread. Forex Traders use this method to calculate the value of each currency pair at any given period. In this article, we will analyze some low spread currency pairs that are safe for trading.
Low Spread Currency Pairs to Trade on Forex Market
Here are some low spread currency pairs that traders consistently show trust in.
The EUR/USD has a spread or daily range of 1.5%, which makes it the pair with the lowest Spread. It is also the most traded pair in the Forex market. In the typical scenario, the variable spreads for this pair vary between 0.1 pip to 0.3 pips. In the case of fixed spreads, this value varies between 0.3 pips to 0.5 pips. However, it is essential to highlight that this range does not take into account the commission charged. However, this currency pair is also a volatile pair that is significantly affected by world and political events, social media activities, etc.
Also Read: Best Fixed Spread Forex Brokers
Moreover, since the Eurozone comprises many countries, it is not uncommon for this low spread currency pair to experience spikes. These factors make the EUR/USD currency pair an exciting pair to invest in. However, even with all the volatility and spikes, this currency pair is consistently able to maintain its Spread and ability to deliver profits.
The most significant factor that works in the favor of this currency pair is that Japan is an export-based economy and the U.S. is an import-based economy. Thus, the trading sessions for this pair are quite distinct. This factor allows traders to focus entirely on one economy when needed. Moreover, the USD/JPY currency trade has a variable spread that varies between 0.2 pips to 2 pips. The USD/JPY has an average daily range of 80 and is, thus, the pair with the second-lowest Spread.
The USD/CHF is a low spread currency pair that offers high stability. It has a spread/daily range of 2.6%. This stability is primarily because the Swiss banking system is seen as one of the best banking systems in the world. Moreover, the fact that the Franc experiences to zero inflation further helps in this regard. Thus, the USD/CHF is one of the most traded low spread currency pairs in the Forex market. The variable spreads range from 0.5 pips to 5 pips for this pair, with the average Spread being 1.2 pip.
In the current scenario, this is a unique low-spread currency pair, primarily because of the significant movements that the British pound is currently experiencing. This volatility, combined with immense liquidity, makes the GBP/USD pair an idea low spread currency pair for traders looking to earning big profits. The variable spreads for this currency pair vary between 0.3 to 2.7 pips. This figure does not take into account the commission charged.
The EUR/JPY is the only non-USD currency pair with low Spread. It has a spread/daily range of 1.9%. However, there are a few things that must be clarified. Since both the economies involved are small, it is normal for this currency pair to see significant movements. Thus, this is a sensitive currency pair. Yet another interesting fact about this currency pair is that it rarely moves sideways. The EUR/JPY isn’t precisely a low spread currency pair. However, the Spread isn’t also very high, which makes it an exciting pair for forex traders. This pair has an average daily range of 63 pips, and the variable spreads range from 0.5 pips to 5.7 pips.
How to Minimize Spread
Even when you are trading low-spread currency pairs, there are ways to minimize Spread further. To minimize Spread, trade during the hours when buyers and sellers are most active. During these hours, the Money Makers narrow down their Spreads in response to increased demand due to the high number of buyers and sellers for specific currency pairs. The second way to minimize spread is by not putting money in thinly traded currencies. When traders trade popular currencies, such as the USD/EUR pair, there are several Money Makers competing for business. However, in the case of thinly traded currencies, there is very little competition in terms of Money Makers. This leads to a monopoly of the handful of Money Makers that exist in the market for that specific currency pair.
The Final Word
Based on the historical figures, the EUR/USD and GBP/USD currency pairs have the lowest spread-to-movement ratio and, thus, are considered the safest low Spread currency pairs to trade. However, traders must constantly monitor daily average movements to see which pairs are safe to trade. Tracking average figures is the best way to understand when and how to trade. We hope this article will help you make some important decisions.