Top 5 Low Spread Forex Pairs To Trade

As with any business, forex comes with transaction costs. Fortunately, as a currency speculator, the expenses to participate in the markets are minimal. But, the one constant cost to deal with is the spread.

The concept is pretty simple. Forex brokers perform an excellent and complex job of offering us access to the markets. They add a mark-up (i.e., the spread) in prices to compensate for their efforts.

On the bright side, forex is still an incredibly cheap market to trade. However, spreads are still a big deal for many traders, especially day traders and scalpers.

So, this article will cover the significance of this ideology and the top 5 low spread forex pairs to follow.

The importance of low spreads

While it may seem insignificant, a mere variation can make a big difference. Let’s assume you paid, on average, a pip spread on EURUSD. Assuming you traded a standard lot on this pair (where every pip is usually worth $10), executing this position would cost you $10.

If you opened two orders daily for 30 days, that would total $600 in transaction costs. This example is quite conservative because the average investor trades far more often.

So, this tells us that reducing execution fees is necessary, particularly if you trade often. Low spreads are also associated with stability and high liquidity. More people can place orders smoothly and regularly when a pair is 'cheap.'

The sheer volume essentially stabilizes price movements. For instance, major or US-based pairs offer the lowest spreads and are less volatile. Although some level of volatility is necessary, too much of it can also be bad.

Let’s consider more volatile markets: exotic pairs. While offering unique opportunities, they are more volatile, meaning higher spreads. You’ll see that such markets tend to be ‘choppy’ or erratic in many cases since they are thinly traded.

Traders also desire tight spreads for finer entries and profit targets. It’s common for scalpers to target as low as five pips or less for a position. Therefore, if a pair incurs even a two pip spread, the price would need to travel further to book profits.

Nevertheless, now let's dive into the top 5.

1. EURUSD

Many scalpers may only follow this pair as it’s attractive to trade for several reasons. Firstly, it’s the cheapest as you generally won’t pay above a pip spread with most brokers.

Secondly, as the most traded currency pair in forex, the euro is far less volatile, with a reasonable daily range. Due to the enormous liquidity, you are less likely to experience any slippage or execution issues.

Moreover, you can find the latest and most historical data during analysis due to the interest in major pairs.

2. GBPUSD

GBPUSD (or ‘Cable’) also frequently ranks highly in the most traded currency markets, representing two of the most dominant economies in the United Kingdom and America. Typically, you shouldn’t pay above a two pip spread here.

However, this market is distinct in its high volatility. It’s common to see this instrument move several hundreds of pips for weeks or months in one direction.

Yet, at the same time, Cable is still relatively stable and liquid, hence why it offers affordable transaction costs.

3. USDCAD

Like the Pound, USDCAD (or ‘Loonie’) doesn’t generally incur more than a two pip spread. This pair is normally the second-most volatile major market after GBPUSD. Loonie is a commodity currency as Canada is a substantial oil exporter.

Thus, CAD’s price strongly correlates to the ‘Brent Crude,’ making USDCAD an interesting market if you’re looking for a pair driven less by US economics.

Like GBPUSD, Loonie’s volatility is not excessive like other non-USD instruments (although it can be in extreme cases).

4. EURJPY

While EURJPY (or the ‘Yuppy’) has an average spread of about three pips with your run-of-the-mill broker, it’s still not overly expensive for most traders. Alternatively, you may consider a zero spread account.

Overall, EURJPY is an excellent pair for your watchlist. It shares little correlation with the ‘greenback.’ Therefore, this market will not greatly expose you to American events. Also, Yen-based pairs are more volatile than USD-based pairs.

Therefore, you can experience more extensive daily ranges than the latter. As a minor pair, EURJPY is more sensitive to fundamental events, especially concerning Japan, because it has a smaller economy than the US or the EU.

5. EURAUD

EURAUD has slightly higher spreads than the four previously mentioned markets (usually not above five pips). However, similar to EURJPY, it can produce equally pronounced movements than US-focused securities.

While not a major pair, Euro Aussie still enjoys substantial interest from speculators as it represents prominent economies in the European Union and Australia which are vastly different in size and scope.

The Australian dollar is another commodity currency as Australia is a massive gold exporter. Overall, EURAUD is a suitable minor pair with reasonable spreads, providing diversification away from American fundamentals.

Summary

It’s worth noting that most of the pairs we’ve highlighted here are US dollar-linked. Thus, you should understand the correlations and ensure you’re not unintentionally doubling your risk by taking the same position (i.e., buying USDCAD and selling GBPUSD).

Nonetheless, transaction costs can impact your bottom line, more so for short-term chartists. Although spreads tend to be stable for most trading sessions, they can widen erratically during high-impact news releases and illiquid periods.

Therefore, you must understand any factors that increase spreads to keep them as low as possible.