The Difference a Few Pips Can Make

Filed under: Learn Forex Trading |

Picture 1For today’s forex related article, I am going to talk a little bit more about the spread and how finding a broker with a competitive spread can positively affect your trading and your bottom line profit/loss figures.

 

To begin with, let’s say that you have a broker that offers an average of 2.5 pips across all currency pairs that you trade. This is not bad, and it is in fact fairly competitive. You might well be happy with this, and cannot be bothered going through the process of changing brokers just to get a few measly pips better on the spread. However, a few pips, in the long term, can go a very long way.

 

Let’s say that your average stop loss is 25 pips, and your average target is 50 pips. In this scenario, 2.5 pips represents 10% of your stop loss and 5% of your target. What this means is that if you risk $100 on the trade, then the spread will cost you $10. If you make 500 trades in a year, then the spread will cost you a massive $5000 – a lot by anyone’s standards. Now the spread is not looking so small is it?

 

Now, let’s say you find another broker who offers an average spread of just 1.5 pips. Using the same scenario of an average stop loss of 25 pips and an average target of 50 pips, this time the spread will account for just 6% of the stop loss and 3% of the target. What this means is that if you risk $100 on the trade, then the spread will cost you $6. So, if 500 trades are made in a year, the spread will now cost $3000 – a saving of $2000!

 

What all of this means is that, if you were trading with a bank of $10,000, your yearly profit would rise by a massive 20% by using the second broker. That is a big difference – so consider the spread carefully and choose a broker that is both reliable and offers the best spread possible.

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