The spread is the difference between the bid (buy) and ask (sell) price when you are trading financial instruments such as forex currency pairs. Forex brokers charge you a spread on each trade that you place, which can immediately put your position into the red.
To calculate the spread in forex, you have to work out the difference between the buy and the sell price in pips. You do this by subtracting the bid price from the ask price. For example, if you’re trading GBP/USD at 1.32089/1.2091, the spread is calculated as 1.2091 – 1.2089, which is 0.0002 (2 pips).
Some brokers will also charge a commission fee on top of the spread, not to mention there might be delayed trade execution speeds which can cause slippage on your trades and lead to a different price than you might have expected. For this reason, prop firms with low spreads are favourable for those of you who might be using spread sensitive strategies, such as forex scalping.
Using a prop firm with low spreads is important because it can save you on trading costs. If you are day trading and placing multiple trades throughout the day, the costs can add up – especially if you are trading large position sizes which you might be with high leverage and a prop firm scaling plan. Even a few pips spread can costs hundreds and thousands over the course of a few trading days.
Tight spreads are important for scalpers who are targeting just a few pips on each trade. The difference in prop firm spreads can be the difference between a winning and losing trading strategy.
For example, if you had a profit target on each trade of 5 pips and the spread was 2 pips with a 2-pip commission and 1 pip slippage, you would need to make 5 pips to just break-even.
On the other hand, if you had a prop firm with low spreads starting from 0.0 pips, no slippage and a 2-pip commission, that same 5 pips would see 3 pips of profit on the trade.
On the other hand, there are some trading strategies that do not require tight spreads. If you are holding positions for a few days or weeks, then you probably wont really notice a big difference in spreads. You would probably be more concerned with finding a prop firm that allows weekend holding and has no time limit.
Low spread prop firms are important for anyone who is using a scalping strategy that is spread dependant. Even if this is not the case, you can still save on trading costs in the long run with tight spreads. Just keep in mind, this is not the only thing you need to look for when choosing a proprietary trading firm. You will also want to consider the trading rules, objectives, profit share and user feedback.