In the world of finance, proprietary trading, or “prop trading,” stands out as an intriguing practice where skilled individuals or institutions trade their capital. Think of it as a strategic game where each move impacts profits and losses.
Spreads, the gaps between the bid and ask prices, are crucial in this landscape, directly influencing trading costs. Tight spreads mean lower transaction costs, enhancing profits, while wide spreads can diminish gains. Understanding the lowest spread prop firms is essential for traders, whether experienced or new to the game.
What are Spreads?
Spreads in trading refer to the difference between the buying price (ask) and the selling price (bid) of a financial instrument such as a stock, currency pair, or commodity. This difference is crucial as it directly influences the cost of trading and ultimately impacts the profitability of a trade.
Impact on Trading Profitability
Understanding spreads is essential for traders as it significantly affects their profitability. A wider spread means higher transaction costs, making it more challenging to generate profits from trades. On the other hand, a narrower spread reduces costs, potentially leading to more profitable trading outcomes.
Here’s how they impact trading profitability:
Cost of Trading:
- When you buy or sell an asset, you pay the spread as a transaction cost.
- A tight spread (small gap) means lower costs, which is beneficial for traders.
- Conversely, a wide spread (large gap) increases costs and eats into potential profits.
Profit Margin:
- Imagine you’re trading currency pairs in the foreign exchange (forex) market.
- If the spread is narrow (e.g., 1 pip), you can enter and exit positions more efficiently.
- A wider spread (e.g., 5 pips) reduces your profit margin, especially for short-term trades.
Scalping and Day Trading:
- Traders who engage in scalping (quick, frequent trades) rely on tight spreads.
- They aim to profit from small price movements, so low transaction costs are crucial.
- Similarly, day traders benefit from narrow spreads when making multiple trades within a day.
Risk-Return Balance:
- Spreads directly affect your risk-reward ratio.
- A smaller spread allows you to set tighter stop-loss levels, reducing potential losses.
- Balancing risk and reward becomes easier with favorable spreads.
Choosing a broker or prop firm with competitive spreads can significantly impact your overall profitability.
How to Calculate Spreads in Pip?
To calculate the spread in forex, you need to work out the difference between the buy and sell price in pips.
For example, if you’re trading GBP/USD at 1.2151 / 1.2153, the spread is calculated as 1.2153 – 1.2151, which is 0.0002.
The spread is usually measured in pips, the smallest unit of the price movement of a currency pair. For most currency pairs, one pip is equal to 0.0001, except for the Japanese Yen, which is only quoted to 2 decimal places
Why Do Low Spreads Matter?
Low spreads are crucial for traders as they directly impact trading profitability. Tight spreads can significantly enhance trading strategies, such as scalping, high-frequency, and day trading. Here are some scenarios where tight spreads can make a significant difference:
- Scalping Strategies: Scalpers aim to capture small price movements and generate profits from frequent trades. Low spreads allow scalpers to enter and exit trades more frequently without sacrificing a large portion of their profits.
- High-Frequency Trading: High-frequency traders execute a large number of trades in a short period. Low spreads enable them to enter and exit positions at more favorable prices, reducing their overall trading costs.
- Day Trading: Day traders aim to profit from intraday price movements. Low spreads allow them to enter and exit trades more cost-effectively, increasing their profit potential.
- Increased Trading Opportunities: Low spreads open up a wider range of trading opportunities for traders. With tighter spreads, it becomes more cost-effective to trade a variety of currency pairs, allowing traders to capitalize on different market conditions and diversify their portfolios.
- Improved Profit Potential: Low spreads directly impact a trader’s profit potential. When the spread is narrow, traders require smaller price movements to break even or generate profits. This means that traders can achieve their profit targets more easily, even if the market is experiencing low volatility.
- Enhanced Transparency: Low spread forex trading often promotes greater transparency in the market. When spreads are high, it can be challenging for traders to accurately assess the true value of a currency pair. However, when spreads are low, it becomes easier to determine the fair value of a currency pair, as there is less distortion caused by excessive bid-ask spreads.
Low spreads are essential for traders as they directly impact trading profitability and open up various trading strategies. By opting for low spread brokers, traders can enhance their trading performance and increase their chances of success in the forex market.
Prop Firms With Lowest Spreads
Here are forex prop firms offering low spreads that forex traders can benefit from:
The 5ers
The 5ers is a prop trading firm that offers low spreads and instant funding trading account. It offers competitive spreads during standard market fluctuations, with major currency pairs like EUR/USD, GBP/USD, and USD/JPY selling from 0.2 pips to 0.9 pips.
Additionally, the commission rate is set at $4 per Standard Lot for a round trip trade. They provide traders with up to $500,000 in trading capital for live markets. The profit split is 90%, and the firm has a 10% drawdown policy, meaning traders are not liable for losses beyond this threshold.
FTMO
FTMO is a prop trading firm with low spreads, starting from 0.6 pips. They offer instant funding from $10,000 to $200,000 and a profit split of 90%. The firm has a 5% daily loss limit and a 10% maximum loss limit.
Funded Trading Plus
Funded Trading Plus is another prop trading firm with low spreads starting from 1 pip. They offer instant funding from $5,000 to $250,000 and a 70-80% profit split. The firm has a 3-4% daily loss limit and a 5-8% maximum loss limit.
Lark Funding
Lark Funding is a prop trading firm with low spreads, starting from 1 pip. They offer instant funding from $5,000 to $1,000,000 and a profit split of 75-80%. The firm has a 3-4% daily loss limit and a 5-8% maximum loss limit.
SurgeTrader
SurgeTrader is a prop trading firm with low spreads, starting from 1 pip. They offer instant funding from $5,000 to $1,000,000 and a profit split of 75%. The firm has a 10% daily loss limit and a 10% maximum loss limit.
FundedNext
FundedNext is a prop trading firm with low spreads, starting from 1 pip. They offer instant funding from $5,000 to $1,000,000 and a profit split of 75-80%. The firm has a 3-4% daily loss limit and a 5-8% maximum loss limit.
Audacity Capital
Audacity Capital is a prop trading firm with low spreads, starting from 1.6 pips. They offer instant funding from $10,000 to $480,000 and a 50-85% profit split. The firm has a 10% daily loss limit and a 10% maximum loss limit
Prop trading firms offer low spreads, which can improve trading performance and profitability. By selecting a firm with low spreads, traders can take advantage of small price changes, trade more efficiently, and boost their overall trading results.
Below is a table that shows comparisons of each firm mentioned above.
