Using Zero account Spread Account in Forex Trading: Advantages and Disadvantages

Using Zero account Spread Account in Forex Trading: Advantages and Disadvantages


Using Zero Spread Accounts in Forex Trading

Zero Spread accounts are trading accounts offered by brokers that have no difference between the bid and ask price. 

Such accounts allow traders to know in advance what their entry and exit levels will be when they open positions.

Zero spread accounts are also helpful for calculating non-trading losses, such as slippage, and are ideal for some Forex strategies including high-frequency scalping and day trading.

When Forex brokers started offering their services, they touted their low spreads and low commission rates as their primary marketing tools. 

However, with the advent of Electronic Communication Network (ECN) brokers and Straight Through Processing (STP) brokers competing for best price, zero spread accounts became the newest trending marketing tool Forex brokers used to entice potential traders.

Advantages of Zero Spread Accounts
Zero Spread Accounts offer small traders the chance to compute their executions precisely, without the issue of tightening or widening of spreads.

For example, when trading on the wrong side of the move of a USD/JPY during a big fundamental data release, like the Rate Decision of the Bank of Japan, having a Zero Spread Account would allow traders to change their trade bias accordingly, without the additional damage to their trading account caused by a spiking Forex spread (which could be more than 300 pips greater than a normal spread) on a normal Forex account.

Disadvantages of Zero Spread Accounts

However, there are disadvantages to Zero Spread Accounts. 

Forex brokers also have to make money in various other ways. These brokers might offer fixed commissions (thus, simulating the fixed spread accounts), smaller/bigger leverage, bigger initial account opening size, slightly slower execution speeds, non-application of Negative Balance Protection, tighter Margin Calls and Stop Loss Levels, or various permutations of the above mentioned tactics.

How to compare brokers that offer Zero Spread Accounts

One of the first things to look out for when comparing zero spread account brokers is how much commission they charge. 

Some brokers charge a nominal commission or fee, as well as adding a small markup to the spreads, whilst claiming to be zero spread brokers.

There are also brokers who offer zero spreads without commission. They tend to be dealing desk brokers who do not send clients’ positions into the open market (liquidity providers).

Conclusion

In conclusion, zero spread Forex trading offers new traders the opportunity to try out currency trading without being exposed to high transaction costs.

However, the Milton Friedman’s economic principle that “there is no such thing as a free lunch” also applies to the Forex market, and especially to Zero Spread Accounts. 

Traders therefore need to examine commission, fees, and tactics employed by the broker that may provide them with the opportunity to make money from their clients.

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