11 minute read
What Does Raw Spread Mean in Forex? A Comprehensive Guide
from Exness
by Exness Blog
Forex trading is a dynamic and complex world, filled with jargon that can confuse even experienced traders. One term that frequently pops up when exploring brokers or trading platforms is raw spread. If you’re wondering, What does raw spread mean in forex? or how it impacts your trading, you’re in the right place. This comprehensive guide will explain raw spreads in detail, explore their benefits and drawbacks, and help you decide if they’re the right fit for your trading strategy. By the end, you’ll have a clear grasp of raw spreads and how they can shape your forex journey.
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Understanding Spreads in Forex Trading
To fully understand raw spreads, we first need to cover the basics of spreads in forex trading. A spread is the difference between the bid price (the price at which you can sell a currency pair) and the ask price (the price at which you can buy it). This difference represents the cost of entering a trade and is how brokers often generate revenue.
For instance, if the bid price for EUR/USD is 1.1050 and the ask price is 1.1053, the spread is 0.3 pips. A pip is the smallest price movement in forex, typically 0.0001 for most currency pairs. Spreads vary based on the broker, market conditions, and account type. This variability leads us to the concept of raw spreads, a feature that’s becoming increasingly popular among traders seeking cost efficiency and transparency.
Defining Raw Spreads in Forex
So, what exactly does raw spread mean in forex? A raw spread is the unfiltered, interbank market spread that a broker receives directly from liquidity providers, such as banks, hedge funds, or other financial institutions, without any markup added by the broker. It’s the purest form of spread, reflecting the actual cost of trading in the interbank forex market.
Unlike traditional accounts where brokers inflate the spread to include their profit margin, raw spread accounts pass on the exact spread from the market. To compensate for offering these tight spreads, brokers typically charge a separate commission per trade. For example, a raw spread account might offer a spread as low as 0.0–0.3 pips on EUR/USD, paired with a commission of $6–$8 per lot traded.
Raw spread accounts are often associated with ECN (Electronic Communication Network) or STP (Straight Through Processing) brokers, who provide direct access to the interbank market, ensuring transparency and competitive pricing.
How Raw Spreads Function in Practice
To grasp how raw spreads work, it’s helpful to understand the role of a forex broker. Brokers act as intermediaries, sourcing liquidity from large institutions that provide bid and ask prices for currency pairs. These prices come with a natural spread, which is the raw spread. In a raw spread account, the broker delivers this spread to the trader without modification.
Here’s how it typically works:
· The broker passes the interbank spread directly to you, which can be as low as 0.0 pips during high-liquidity periods.
· Instead of earning revenue through a spread markup, the broker charges a commission, which may be fixed (e.g., $7 per lot) or variable based on trade size.
· Spreads fluctuate based on market conditions, such as liquidity and volatility, and can widen during major economic events.
This setup appeals to traders who value low costs and direct market access, particularly those employing high-frequency or scalping strategies.
Raw Spreads vs Standard Spreads: What’s the Difference?
To clarify the value of raw spreads, let’s compare them to standard spreads. In a standard spread account, the broker adds a markup to the interbank spread, resulting in a higher spread for the trader. For example, a raw spread of 0.2 pips on EUR/USD might become 1.5 pips in a standard account due to the broker’s markup. In contrast, a raw spread account offers the 0.2-pip spread but includes a commission.
Standard spread accounts are typically commission-free, as the broker’s profit is embedded in the spread. This makes them simpler for beginners but potentially more expensive for frequent traders. Raw spread accounts, on the other hand, are designed for transparency and cost efficiency, especially for traders who execute multiple trades daily.
Raw spread accounts are best suited for scalpers, day traders, and algorithmic traders who benefit from tight spreads. Standard spread accounts may be preferable for beginners or those who trade less frequently and prefer predictable costs without commissions.
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Why Choose a Raw Spread Account?
Raw spread accounts offer several advantages that make them appealing to specific types of traders. Let’s explore the key benefits.
Cost Efficiency for High-Volume Traders
Raw spreads can significantly reduce trading costs, especially for those who trade frequently. With spreads starting at 0.0 pips, the savings per trade can add up, even when factoring in commissions. For example, a scalper executing dozens of trades daily can save hundreds of dollars monthly compared to a standard account with wider spreads.
Transparency in Pricing
Raw spreads provide a clear view of the market’s true pricing, as there’s no broker markup. This transparency is ideal for traders who want to know exactly what they’re paying for and prefer to avoid hidden costs.
Faster Trade Execution
Raw spread accounts are typically offered by ECN or STP brokers, which connect traders directly to the interbank market. This results in faster trade execution and minimal slippage, which is critical for strategies like scalping that rely on precise timing.
Ideal for Scalping and Day Trading
Scalping involves making small profits from numerous trades, often within minutes. Raw spreads minimize the cost of each trade, making this strategy more viable. Similarly, day traders who open and close positions within a single session benefit from lower costs.
Optimal During High-Liquidity Periods
During periods of high market liquidity, such as the overlap of the London and New York trading sessions, raw spreads can drop to near zero. This allows traders to capitalize on tight pricing and maximize profitability.
Potential Drawbacks of Raw Spread Accounts
While raw spread accounts have clear advantages, they’re not perfect for every trader. Here are some potential downsides to consider.
Commission Costs
The commission charged per trade can add up, particularly for traders with low trading volumes. If you trade infrequently, the commission may outweigh the benefits of a tighter spread. It’s essential to calculate the total cost (spread plus commission) to determine if a raw spread account is cost-effective for you.
Variable Spreads and Market Volatility
Raw spreads are variable, meaning they can widen significantly during periods of low liquidity or high volatility, such as during major economic announcements. Traders must be prepared for these fluctuations, which can increase trading costs unexpectedly.
Complexity for Beginners
Calculating the total cost of trading in a raw spread account (spread plus commission) can be more complex than using a standard account with a single spread-based cost. Beginners may find this added complexity challenging.
Not Suitable for All Trading Styles
If you’re a swing trader holding positions for days or weeks, the benefits of raw spreads may be minimal. The commission costs could outweigh the savings from lower spreads, making standard accounts a better choice for long-term strategies.
Choosing the Right Raw Spread Broker
Selecting a broker for a raw spread account is a critical decision. Here are key factors to consider when evaluating brokers.
Regulatory Compliance
Ensure the broker is regulated by a reputable authority, such as the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investments Commission (ASIC), or the Cyprus Securities and Exchange Commission (CySEC). Regulation ensures the broker operates transparently and protects your funds.
Commission Structure
Compare the commission rates across brokers. Some charge a fixed fee per lot, while others use a variable commission based on trade size. Choose a structure that aligns with your trading volume and strategy.
Spread Consistency
While raw spreads are generally low, their consistency varies by broker. Research the average spreads for major currency pairs like EUR/USD or GBP/USD to ensure they meet your expectations.
Trading Platform Compatibility
Ensure the broker offers a reliable platform, such as MetaTrader 4, MetaTrader 5, or cTrader, that supports raw spread accounts and provides fast execution. A user-friendly platform is essential for efficient trading.
Account Requirements
Some raw spread accounts require higher minimum deposits or are restricted to professional traders. Check the broker’s requirements to confirm eligibility.
Customer Support Quality
Reliable customer support is crucial for resolving issues related to spreads, commissions, or trade execution. Test the broker’s support channels (e.g., live chat, email, or phone) before committing.
Calculating Trading Costs with Raw Spreads
To determine if a raw spread account is cost-effective, you need to calculate the total cost of trading, which includes both the spread and the commission. Here’s a simple example:
Suppose you’re trading 1 lot of EUR/USD with a raw spread of 0.3 pips and a commission of $7 per lot (round-turn). If 1 pip equals $10 for a 1-lot trade, the spread cost is $3 (0.3 pips × $10). Adding the $7 commission, the total cost per trade is $10.
Compare this to a standard account with a 1.8-pip spread and no commission. The spread cost would be $18 (1.8 pips × $10). In this case, the raw spread account is cheaper. However, if the spread widens to 1.2 pips during volatility, the total cost becomes $19 ($12 for the spread + $7 commission), making the standard account more cost-effective. Always consider market conditions when evaluating costs.
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Tips for Maximizing Raw Spread Accounts
To make the most of a raw spread account, consider these practical tips.
Trade During High-Liquidity Periods
Raw spreads are tightest when market liquidity is high, such as during the London-New York session overlap. Avoid trading during major news events when spreads can widen significantly.
Test with a Demo Account
Before committing real funds, use a demo account to test a raw spread account. This allows you to understand how spreads and commissions affect your strategy without financial risk.
Monitor Total Costs
Keep a trading journal to track your total costs (spreads plus commissions). This helps ensure the raw spread account aligns with your financial goals.
Leverage Advanced Tools
Use trading platforms with tools to analyze spreads, monitor market conditions, and optimize trade execution. This is particularly useful for scalpers and algorithmic traders.
Stay Disciplined
Raw spread accounts require discipline to manage variable spreads and commissions effectively. Stick to your trading plan to avoid unexpected costs.
Debunking Myths About Raw Spreads
Several misconceptions surround raw spread accounts. Let’s address a few common ones.
“Raw Spreads Are Always Cheaper”
While raw spreads are often lower, the added commission can make them more expensive in certain scenarios, especially during volatile market conditions. Always calculate the total cost before deciding.
“Raw Spreads Guarantee Profits”
Low spreads reduce costs but don’t ensure profits. Success in forex depends on a solid strategy, risk management, and market knowledge, not just low spreads.
“All Raw Spread Brokers Are ECN”
Not all brokers offering raw spreads use a true ECN model. Some operate STP or hybrid models. Verify the broker’s execution model to ensure transparency and direct market access.
Consulution: Are Raw Spread Accounts Right for You?
Raw spread accounts offer a transparent and potentially cost-effective way to trade forex, particularly for scalpers, day traders, and high-volume traders. By providing direct access to interbank spreads, these accounts minimize trading costs and enhance pricing transparency. However, the added commissions and variable spreads require careful consideration, especially for beginners or low-frequency traders.
To decide if a raw spread account is right for you, evaluate your trading style, frequency, and goals. If you trade frequently and prioritize low costs, a raw spread account could be a game-changer. For occasional traders or those seeking simplicity, a standard account might be more suitable.
Ultimately, understanding what raw spread means in forex empowers you to make informed decisions and optimize your trading approach. Take the time to research brokers, test accounts, and calculate costs to find the best fit for your forex journey.
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