ZERO Spread Phenomenon
The ZERO spread phenomenon is a very interesting one and is only possible in non-centralized markets such as forex. Let’s discover how ZERO spread is possible in forex market.In my opinion the goal of every honest forex broker should be to provide traders the best possible price available. The way they can do that is by choosing the best possible price from several different banks and from every trader on their platform.
So let’s say Bank A has price of GBP/USD as 1.9950/1.9952, and Bank B has price of GBP/USD as 1.9948/1.9950.
So what your broker does is it takes the lowest bid price from Bank A, which is 1.9950, and it takes the lowest offer price from Bank B, which is also 1.9950. Because bid is from one bank, and offer is from another bank, they can stay on your broker with ZERO spread without executing against one another.
Getting screwed on Stop/Losses. Let’s now discover why the stop/losses will get hit less often if you use a broker with natural trading environment.
Well…first of all, if the environment of the broker is not natural, it means that they constantly need to worry about the accuracy of their price.
Many forex traders trade during news, and when price gets very volatile during news, the forex broker with not-natural environment becomes afraid that the traders will take advantage of their price feed and will get filled on much better price than the real market price.
Because of that, the broker is forced to artificially raise their spread during news. It happens quite often that the spread is raised from 2 pips to 30 pips and sometimes more.
So if your stop/loss is 20 pips away, and the spread just got raised, even for 1 second, you will get stopped out on a price that you would never be stopped out on if you traded with broker that provides natural trading environment.
Every day is filled with many different news announcements, so if you do not have a broker with natural trading environment, you can get screwed on spread and stops very often.
7 comments:
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A pip is the smallest unit of measure for any currency. In most currencies, this is the fifth digit, or the fourth after the decimal point; in dollars, each pip is equivalent to one-hundredth of a penny. One important exception is the Japanese Yen, in which each pip is the second unit after the decimal point, meaning each pip equals one cent.
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