What Does Raw Spread Mean in Forex?
In the dynamic world of forex trading, understanding the terminology and mechanics of the market is crucial for success. One term that often comes up, especially among experienced traders, is "raw spread." But what does raw spread mean in forex, and why is it important? In this article, we’ll dive deep into the concept of raw spreads, how they work, their benefits and drawbacks, and why they matter to traders. Whether you're a beginner or a seasoned trader, this guide will provide valuable insights to help you navigate the forex market more effectively.
What is a Raw Spread in Forex?
A raw spread in forex refers to the unfiltered, interbank market spread that brokers offer to their clients without adding any markups. In simpler terms, it’s the direct cost of trading as provided by liquidity providers, such as banks or financial institutions, to the broker. The spread is the difference between the bid price (the price at which you sell a currency pair) and the ask price (the price at which you buy a currency pair).
Unlike standard accounts where brokers may add a markup to the spread to generate profit, raw spread accounts offer the tightest possible spreads, often starting from 0 pips. However, brokers offering raw spread accounts typically charge a commission per trade to compensate for the lack of markup. This makes raw spread accounts particularly appealing to traders who prioritize low trading costs and transparency.
How Do Raw Spreads Work?
To understand raw spreads, it’s essential to grasp how spreads function in the forex market. The forex market operates through a network of liquidity providers, including major banks, financial institutions, and market makers. These entities provide bid and ask prices for currency pairs, and the difference between these prices is the spread.
In a raw spread account:
No Broker Markup: The broker passes the interbank spread directly to the trader without adding any additional cost to the spread.
Commission-Based Model: Instead of profiting from a wider spread, brokers charge a fixed or variable commission per trade. For example, a broker might charge $5 per lot traded.
Tighter Spreads: Raw spreads are typically very low, often ranging from 0.0 to 0.3 pips for major currency pairs like EUR/USD during high liquidity periods.
ECN or STP Execution: Raw spread accounts are usually offered through Electronic Communication Network (ECN) or Straight Through Processing (STP) brokers. These brokers connect traders directly to the interbank market, ensuring faster execution and minimal interference.
For example, if the interbank market offers a bid price of 1.2000 and an ask price of 1.2001 for EUR/USD, the raw spread would be 0.1 pips. In contrast, a standard account might widen this spread to 1.0 or 2.0 pips to include the broker’s markup.
Why Are Raw Spreads Important in Forex Trading?
Raw spreads are a game-changer for certain types of traders, particularly those who rely on high-frequency trading strategies or trade large volumes. Here’s why raw spreads matter:
1.
Lower Trading Costs
Raw spreads are ideal for traders who want to minimize their trading costs. Since the spreads are as low as possible, traders can save significantly, especially when trading frequently or in large volumes. For scalpers, who aim to profit from small price movements, even a fraction of a pip can make a significant difference in profitability.
2. Transparency
With raw spreads, traders get a clear view of the actual market conditions without any broker manipulation. This transparency builds trust and allows traders to make informed decisions based on real-time market data.
3. Faster Execution
Raw spread accounts often come with ECN or STP execution, which means trades are executed directly in the interbank market. This reduces the risk of requotes or slippage, ensuring faster and more reliable trade execution.
4.
Ideal for Scalping and Day Trading
Scalpers and day traders benefit the most from raw spreads because they execute multiple trades in a single session. The low spreads combined with fast execution make these accounts perfect for short-term trading strategies.
Pros and Cons of Raw Spread Accounts
Like any trading tool, raw spread accounts have their advantages and disadvantages. Understanding these can help you decide if a raw spread account is right for you.
Pros
Cost Efficiency: Lower spreads mean reduced trading costs, especially for high-volume traders.
Transparency: No hidden markups ensure you’re trading at true market prices.
Fast Execution: ECN/STP brokers offer lightning-fast trade execution, minimizing slippage.
Ideal for Advanced Strategies: Scalping, algorithmic trading, and high-frequency trading thrive in raw spread environments.
Cons
Commissions: While spreads are low, brokers charge commissions, which can add up for small-volume traders.
Complexity: Raw spread accounts may require a deeper understanding of forex market mechanics, making them less beginner-friendly.
Higher Minimum Deposits: Some brokers require higher initial deposits for raw spread accounts compared to standard accounts.
Variable Spreads: Raw spreads can widen significantly during periods of low liquidity or high volatility, such as during major economic news releases.
Who Should Use Raw Spread Accounts?
Raw spread accounts are not for everyone. They are best suited for:
Scalpers: Traders who execute multiple trades within minutes or hours benefit from tight spreads.
High-Volume Traders: Those trading large lot sizes can save significantly on spreads.
Algorithmic Traders: Automated trading systems often rely on low spreads and fast execution to maximize profits.
Experienced Traders: Those with a solid understanding of forex trading can leverage raw spreads to optimize their strategies.
Beginners, on the other hand, might find raw spread accounts overwhelming due to the commission structure and the need for advanced market knowledge. For new traders, a standard account with fixed spreads might be a better starting point.
How to Choose a Raw Spread Forex Broker
If you’re considering a raw spread account, selecting the right broker is critical. Here are some factors to consider:
Regulation and Reputation: Choose a broker regulated by a reputable authority, such as the FCA, ASIC, or CySEC, to ensure your funds are safe.
Commission Structure: Compare the commission fees charged by different brokers. Some offer fixed commissions, while others charge based on trade size.
Trading Platform: Ensure the broker supports a reliable platform like MetaTrader 4, MetaTrader 5, or cTrader, which are popular for raw spread accounts.
Liquidity Providers: A broker with access to top-tier liquidity providers will offer tighter spreads and better execution.
Customer Support: Look for brokers with responsive customer service to address any issues quickly.
Before opening an account, test the broker’s services using a demo account to evaluate spreads, execution speeds, and overall trading conditions.
Raw Spread vs Standard Spread Accounts
To better understand raw spreads, let’s compare them to standard spread accounts:
Spread
0.0–0.3 pips (varies)
1.0–3.0 pips (fixed or variable)
Commission Yes (e.g., $5 per lot) No
Execution
ECN/STP (faster, direct market access)
Transparency High (no broker markup)
Market maker or STP (may have requotes)
Lower (broker may add markup)
Best For Scalpers, high-volume traders Beginners, low-volume traders
Tips for Trading with Raw Spread Accounts
To make the most of a raw spread account, consider the following tips:
Monitor Market Conditions: Spreads can widen during volatile periods, so avoid trading during major news events unless you’re prepared for higher costs.
Calculate Total Costs: Factor in commissions when calculating your trading costs to ensure profitability.
Use Stop-Loss Orders: Protect your capital by setting stop-loss orders, especially in volatile markets.
Leverage Technology: Use trading platforms with advanced charting tools and low-latency execution to maximize the benefits of raw spreads.
Stay Disciplined: Stick to your trading strategy to avoid overtrading, which can increase commission costs.
Conclusion
Raw spreads in forex trading offer a transparent and cost-effective way to trade, especially for scalpers, high-volume traders, and those using advanced strategies. By providing direct access to interbank market spreads without broker markups, raw spread accounts minimize trading costs and enhance execution speeds. However, they come with commissions and may require a higher level of expertise, making them better suited for experienced traders. If you’re considering a raw spread account, take the time to research brokers, compare commission structures, and test their platforms. By understanding how raw spreads work and aligning them with your trading goals, you can gain a competitive edge in the fastpaced world of forex trading.
For more insights into forex trading strategies and tools, follow our blog for the latest tips and updates!
