One of the first characteristics that traders start comparing among forex brokers is prices. Some brokers try to attract their potential clients with ultra-low spreads, and some boast about zero commission rates. It looks like it is easy to make a choice – why pay commissions when you have an opportunity to avoid them?
However, the problem is that trading costs in forex are rather complicated and depend on numerous factors.
Traders tend to concentrate either on spreads or commissions without taking the whole picture into account. In fact, trading expenses are determined not only by spreads and commissions but also such elements as execution quality, slippage, widening of the spread in case of volatile market conditions, financing costs, and even withdrawal fees. Considering a single number makes a misunderstanding of trading costs inevitable.
It becomes especially critical due to the fact that the cheapest account for one trader does not necessarily mean the same for another one. The scalper who executes several dozen trades per day and the swing trader who opens just a few trades per month have different cost priorities. The cheapest account for one may be quite expensive for another.
Thus, comprehension of the way brokers price is important in determining whether one opts for a low spread no commission account or a raw spread account. The question that should not be asked is which pricing model is the best for all but which pricing model suits an individual’s style and goals.
Understanding Low Spread No Commission Forex Brokers
A low spread no commission forex broker incorporates all the trading costs in the spread, and does not charge the trader any commissions per transaction. Spread is the difference between the buying and selling prices of a certain currency pair. Every time a trader opens up a trading position, he or she incurs the spread.
If for instance EUR/USD is quoting at 1.1000/1.1001, the spread is 1 pip. This is what the trader will incur when entering the market. The broker makes profit from the spread, therefore, he or she does not have to charge a commission.
Many traders find this kind of arrangement to be appealing. They know where exactly the fees are coming from, and they do not have to keep computing costs on every single trade. For the newbies, the account is usually easier to deal with.
However, simplicity should not be confused with lower cost.
Most traders believe that by removing commissions, costs will be reduced. However, brokers require money to make profits, meaning that the cost will be passed somewhere else in the price calculation. What matters most is not the presence of a commission but rather the total cost of the transaction.
The Problem with Comparing Brokers by Spread Alone
One of the most widespread errors that many traders make when choosing a broker is to rely exclusively on the advertised spreads.
For instance, a broker can present its EUR/USD spreads as low as 0.0 pips, whereas another broker claims its spreads to be an average of 1 pip. From this perspective, the spread which is lower seems to be the clear winner.
However, trading conditions tend to be a lot more complicated than that.
Firstly, minimum spreads are shown only for the conditions of an ideal market, which might appear only in some rare cases of very high liquidity. The most important thing is the actual average spread that the trader encounters during his trading day. Secondly, the spread is only a part of the trading cost.
A realistic assessment of trading costs should consider:
- Spread costs
- Commissions
- Slippage
- Swap or overnight financing fees
- Currency conversion fees
- Withdrawal fees
- Inactivity fees
- Execution quality
Focusing on one cost while ignoring the others can lead traders to choose an account that appears cheaper but ultimately costs more over time.
How Forex Brokers Actually Make Money
One major myth about no-commission brokers among novice traders is that there is free trading at such brokers. This is actually not the case since all brokers make profits through their business models.
The no-commission brokers usually make their money by increasing the spread that they get from the liquidity providers. Rather than making commissions, they incorporate the payments into the spread that the traders see on the trading platform.
The raw spread brokers do things differently as they give the traders access to the tight spread closer to the market price and then they pay commission for each trade.
Neither model is inherently superior.
However, both types can be very competitive where they are run in an open way and backed up with good execution. The question here is whether the trader understands what he/she is really paying.
A good broker makes sure that he/she shows what the average spread, commission, swap, and account terms are. This will ensure that the trader knows how much he is really paying for his trades.
The Hidden Costs Most Traders Ignore
Although spreads and commissions are the main focus for many traders, there is often another aspect that can lead to higher trading costs.
It usually becomes clear to traders once their account is opened.
The first of those costs is slippage. This is a situation when an order is executed at a price that was not planned by the trader. When volatility is high, prices can quickly change from the time of order placement until the time when the order is filled.
In case of EUR/USD, for instance, a trader may expect buying the currency pair at 1.1000 but end up executing the order at 1.1003.
Another cost factor is spread widening. If there are some economic news released, a decision about interest rates made, or something unexpected happens geopolitically, the liquidity can drop dramatically.
As a result, spreads can widen considerably. A broker offering a 0.3-pip spread under normal market conditions may offer a spread of 3 or even 5 pips during important news events.
In many cases, such costs can be more damaging for the trading business than choosing commission-free or raw spread account types.
Why Execution Quality Matters More Than Advertised Spreads
Many traders waste numerous hours looking at spread tables and pay very little attention to execution quality.
It is usually a big mistake.
Execution quality will define how efficiently your orders will be executed. It will affect slippage, order execution accuracy, speed and trading results in general.
Let’s take a look at two brokers.
Broker A provides average spread on EUR/USD of 0.8 pips.
Broker B provides an average spread of 0.3 pips.
Obviously, on paper, the second broker seems to be significantly cheaper.
However, in case Broker B causes regular slippages in the period of volatility, while Broker A executes all orders accurately, the difference in spread may become irrelevant.
The problem becomes particularly acute for active traders.
Scalpers and day traders usually look for relatively small price movements. Any execution delays may considerably influence the bottom line. The trader trying to make 5 pips profit cannot tolerate slippage of 2-3 pips constantly.
Therefore, it is important to assess execution quality together with spreads and commissions, comparing different brokers.
The cheapest trading environment is not the one with the lowest spread. It is the one which provides consistent execution.
Real Trading Cost Examples: Scalpers, Day Traders, and Swing Traders
The debate between commission-free and raw spread accounts becomes much clearer when viewed through the lens of actual trading behavior.
Scalper Example
Typically, scalpers make tens of transactions daily trying to benefit from even smallest price fluctuations. Since profit margins for scalpers are quite low, transaction costs become a very important part of profitability.
Assuming that a scalper makes 1,200 EUR/USD transactions a year, with an account which has no commissions but 1 pip costs per trade, his/her annual expenses may go as high as $12,000 on standard lots.
A raw spread account, where transaction cost per trade equals 0.8 pips will bring down those costs to $9,600 a year.
That means $2,400 in annual savings.
For a high-frequency trader, that amount can greatly impact profitability. It is one of the reasons why most professional scalpers prefer raw spread accounts.
However, that is possible only when the level of good execution is kept high. Otherwise, frequent slippage will quickly offset all possible savings.
Day Trader Example
The average day trader typically does not trade as often as the scalper but is still an aggressive trader.
Let’s say that a trader places 300 trades annually.
If he uses an account with no commissions but with a fee of $10 for each trade of standard lot size, he will pay around $3,000 annually.
If he uses a raw spread account charging $8.50 per trade, his annual fees will be about $2,550.
It is definitely a good saving but not as big as in the scalper example above.
Now the choice of accounts depends on many other criteria besides price.
Swing Trader Example
Swing traders have different strategies altogether.
They may keep their trades open for days or even weeks on end rather than enter and exit positions throughout the trading session.
If a swing trader were to make 50 trades each year, then the difference between paying $10 and $8.50 per trade will be a mere $75 saving.
It is a saving which is very minor compared to how much they can gain or lose from the market swings over days and weeks.
Simplicity and ease of use take precedence over such minor savings when it comes to swing traders. That’s why account commissions are often attractive to such traders.
Are Raw Spread Accounts Always Better?
Many broker reviews create the impression that raw spread accounts are automatically superior because they provide tighter spreads.
The reality is more nuanced.
Raw spread accounts generally become more attractive as trading frequency increases. Traders executing hundreds or thousands of trades annually can benefit from even small reductions in transaction costs.
However, that does not mean every trader should choose this model.
Beginners often benefit from straightforward pricing structures. Calculating commissions, understanding effective costs, and evaluating execution metrics can be overwhelming for traders who are still learning the fundamentals of risk management.
Likewise, swing traders may see little practical benefit from paying commissions in exchange for marginally lower spreads.
The best account depends on trading frequency, position size, and overall experience.
Rather than asking which account type is objectively better, traders should ask which account structure best matches the way they trade.
How to Evaluate a Low Spread No Commission Forex Broker
Selecting a broker entails far more than comparison of prices alone.
Regulation should be a top priority. A well-regulated broker works according to certain set standards meant to safeguard client money and fair business operations.
Brokers should also demonstrate transparency. They must provide information regarding their spreads, commission fees, swap rate, withdrawal terms, and the method of order execution.
In addition, traders need to consider the average spreads and not the minimal spread offered by the brokers. Average pricing will give an accurate overview of the actual trading conditions.
The quality of execution is another crucial factor. Order execution and trading conditions can bring more value to the table than ultra-low spreads that cannot be achieved.
Withdrawal and funding policies are not something traders should ignore as well. Unexpected withdrawal fees can hurt the profitability of traders who regularly move money around.
In all, the evaluation of a broker should involve the whole trading environment and not just one price measure.
Final Verdict: Which Account Type Actually Costs Less?
The answer to the question does not exist in general terms since the least expensive account will depend on your trading style.
For scalpers, algorithmic traders and other high-frequency traders, raw spread accounts will usually be the more economical option. Even small reductions in spreads could mean significant reductions in costs multiplied by hundreds or thousands of deals.
Active day traders will find the gap smaller. Both pricing schemes could compete and the execution quality will often become the decisive factor.
For novice traders, casual traders and swing traders, accounts without commissions will usually be just as appealing. The convenience of the pricing model could compensate for the modest savings provided by raw spread accounts.
What it comes down to is the fact that traders should not consider only spreads and commissions when selecting their brokers. The cost of trading consists of spreads, commissions, slippage, execution quality, widening of the spreads, swap charges and other account-related fees.
The broker offering slightly higher spreads but great execution quality could end up being cheaper than a broker providing super-low spreads under perfect conditions.
The least expensive account is thus not necessarily the one with the lowest spread advertised on its website.
FAQs
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What is a low spread no commission forex broker?
A low spread no commission forex broker charges trading costs through the spread rather than applying a separate commission fee on each trade.
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Are no-commission forex brokers actually cheaper?
They can be, depending on trading volume, spreads, execution quality, and additional account fees.
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What is the all-in trading cost in forex?
The all-in trading cost includes spreads, commissions, slippage, swap fees, and any other charges related to trading.
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What is better: raw spreads or no commission?
Raw spreads often benefit active traders, while no-commission accounts are generally more convenient for beginners and lower-frequency traders.
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How do forex brokers make money without commissions?
Most commission-free brokers generate revenue through spread markups, swap fees, and other trading-related services.
