The complete guide on spreads for ZAR Forex pairs and lowest-spread brokers
- 1 Lowest spread Forex broker list on ZAR currency pairs
- 2 What is spread in Forex?
- 3 Major, Minor, and Exotic currency pairs
- 4 ZAR Currency Pairs in Forex
- 5 Is it possible to find the Forex broker no spread no commission?
- 6 Why spreads are important while trading ZAR currency pairs?
- 7 What affects spreads in Forex?
- 8 FAQs on spreads for ZAR Forex pairs
Trading in the Forex market essentially means trading one currency against another one at a predetermined exchange rate. Thus, currencies are listed by their value in a different currency. The spread of Forex refers to the difference between the rate at which the broker offers to sell for a currency, and the rate at which the broker purchases the currency.
The market for foreign exchange that trades daily with a volume of $5 trillion includes a variety of participants, such as retailers, Forex brokers, central banks, hedge funds, and even various governments. The entire trading process influences the demand for foreign currencies as well as their exchange rates and the spread of Forex.
Currency exchanges are usually traded in pairs, for example, the U.S. dollar versus the South African rand (USD/ZAR). The first currency within the pair (in this case USD) is known as the base currency. While that second one (in the given example ZAR) is known as the quote or counter currency (base/quote).
The spreads are not universal and they will vary from one currency to another and from a broker to broker. Hence, you cannot really anticipate what your broker will charge for the spread. However, there are market averages and there are the lowest spread Forex brokers which you can freely find. For instance, the market average spread on the most popular Forex currency pair – EUR/USD would be between 1 to 3 pips. Anything below 1 pip would mean that you have found the lowest offer very convenient for you and anything above 3 pips, well, it is what you should avoid.
In this article, we will be discussing the significance of spreads in Forex trading in South Africa. We will review different ZAR currency pairs along with the lowest, market average, and highest spreads available in the market. As a bonus, we will also provide the list of the Forex brokers that offer extremely tight spreads on ZAR currency pairs.
Lowest spread Forex broker list on ZAR currency pairs
First of all, finding a Forex broker that offers ZAR currency pairs is very difficult. In the Forex market, you will find it hard to encounter brokers that provide exotic currency pairs. Most frequently, they will be including major and minor Forex currency pairs within their trading portfolio. Hence, before you actually seek low-cost and low-spread ZAR brokers, you need to actually find the one which has ZAR currency pairs available. Below is the list of the top three Forex brokers with ZAR accounts and with the lowest spreads on ZAR assets.
CySEC, FCA, ASIC
MT4, MT5, WebTrader
FCA, CySEC, ASIC, FSCA, FMA
What is spread in Forex?
Quotes for Forex assets are always offered with bid and ask prices, very similar to what would observe in equity markets. The bid is the price at which the broker or Forex market maker will purchase an amount of the base currency (USD for instance) as a substitute for the counterpart currency (ZAR for example). In contrast, the asking price is the amount at which the brokerage company is willing to offer the base currency against the counterpart currency.
The bid-ask spread refers to the difference in price between when that a broker pays and the price at which it sells an exchange. If a client starts a sell transaction with the broker then the bid price would be displayed. If the client is looking to initiate a purchase trade, then the asking price will be quoted.
Spreads may be smaller or larger depending on the currency being used. The spread of 50 pip between the offer and the asking price of USD/ZAR (in our case) is quite large and not typical. The spread could be between 5 and 25 pips at maximum, again depending on the circumstances and brokers But, the spread may fluctuate and change in a flash, based on the market conditions.
Investors must be aware of the spread of a broker since every speculated trade has to pay or generate enough money to pay for the spread as well as any charges. Additionally, every broker has the ability to make their spread wider and increase the profit per transaction. A spread that is larger means that the buyer will pay more for buying, and get less back when selling. This means that each Vorex broker may charge a different spread, which could increase the cost of Forex transactions.
What is pip in Forex?
Pip is an abbreviation for “percentage in point” or “price interest point.” Pip is the smallest movement in price which an exchange rate may take based on the Forex market’s convention. The majority of currencies are priced to four decimal places, hence, the change in pip is the fourth (fourth) decimal place. Pips are equivalent to 1/100 of percent which is one basis point.
There are many confusing terms in the Forex glossary, but pip is one of the essential and “must-know” aspects of Forex trading. A pip is a fundamental idea in the field of Forex. Forex pairs are utilized to distribute exchange quotes via bid and ask quotes which are precise to 4 decimal places. In simple terms, traders purchase or sell the value of a currency dependent on other currencies. Brokers and other market participants measure exchange rates in pip. Because most currencies are quoted up to the maximum of four decimal places and the smallest change in the pair is one pip. A pip’s value may be determined by dividing 1/10000, or 0.0001 per exchange.
For instance, a trader looking to purchase the USD/ZAR pair is buying US dollars while simultaneously trading a South African rand. On the other hand, a trader who wishes to market US dollars would be able to sell the USD/ZAR pair and buy a South African rand simultaneously. Traders typically use the term “pips” to refer to the gap between the bid and asking prices in the exchange pair as well as to show how much profit or loss could be derived through a transaction.
The direction of the currency pair will determine if traders made profits or lost money from their positions at the close on the same day. An investor who buys USD/ZAR can profit from a rise in the South African rand’s value in relation to that of the US dollar. If the trader purchased the South African rand at 0.0667 and then closes the transaction at 0.0731 they would earn 0.0731 – 0.0667 = 64 pips from the trade.
Major, Minor, and Exotic currency pairs
In the Forex market, you’ll be discussing currency pairs often. It doesn’t matter if the currency pair is the Japanese euro and yen or South African rand and Mexican peso, currency pairs will be the focus of discussion in every conversation. There are three kinds of currency pairs that are major, minor, and exotic.
Major currency pairs
Major currency pairs comprise the most traded currencies around the world. Due to their huge liquidity, they can be traded almost all the time. Additionally, you’ll get the lowest spreads or brokerage charges for dealing with these pairs.
The major currency pairs are:
It is important to note that each major currency pair is backed by one side that is the US dollar at one end. This is for a reason: the dollar is the world’s most popular reserve currency and is involved in approximately 88% of all currency transactions.
Minor currency pairs
If a pair of currencies doesn’t contain one of the main currencies, namely the US dollar, the pair is referred to as minor currency pair or a cross-currency pairing. The most frequently traded minor pairs comprise Euro, yen, or British pound.
The examples of minor pairs are:
Exotic currency pairs
A currency pair that is exotic includes major currencies and the currency of emerging economies (such as Brazil and South Africa). There aren’t many exotic currency pairs that you encounter as frequently as you’ll see minor or major pairs, meaning that spreads may be higher when trading these types of pairs.
The list of the exotic currency pairs includes:
ZAR Currency Pairs in Forex
The South African rand has been named as one of the most volatile emerging market currencies number of times by the leading experts in the Forex field. One of the reasons is that rand is very flexible in reacting to the major events happening both locally and globally. For instance, even the slightest governmental change or political upheaval might press the currency down. This makes ZAR one of the most attractive exotic currencies. However, the fact that it is not among the major and minor Forex assets also makes the choice a bit limited to South African traders. There are only three currency pairs involving ZAR that can be found with the major brokerage companies internationally:
- USD/ZAR – US dollar to South African rand
- EUR/ZAR – euro to South African rand
- GBP/ZAR – British pound to South African rand
All these three currency pairs are very hard to find on brokerage platforms. However, the brokers that we have mentioned above in the paragraph provide US dollar to South African rand pairs within their financial instruments portfolio for South African traders. The spreads on these currency pairs are quite high. So expect to see up to 20 pip charges on GBP/ZAR, around 5 to 7 pip on USD/ZAR, and 6 to 10 pip on EUR/ZAR currency pairs.
Is it possible to find the Forex broker no spread no commission?
It is a dream scenario – trading with a broker which charges 0 commissions and offers 0 spread trading. Too good to be true, right? But, in fact, there are quite a few brokers who propose similar opportunities to the traders. However, it does not mean that such a service is free of charge. You can get no-commission brokers very easily. Due to extremely high levels of competition, almost every top Forex broker in the world will now offer a commissionless trading experience, including the three brokers that we have listed at the beginning of the article. However, finding the broker with 0 spreads is a bit trickier.
No spread offer comes only with a specially designated account type, which is often called the Zero Spread account type. This account type in most cases operates with small commission fees and instead allows traders to operate their trades without spreads, at all. This “spreadless” operation concerns only Forex currency pairs trading. Hence, usually, there is a trade-off between commissions and spreads and you have to choose either of them. Unfortunately, it is not possible to get rid of both since brokers have these two main sources of revenue and they cannot give up both. If you ever encounter the broker that promises no spreads and no commissions simultaneously, it most likely means that the broker will incorporate hidden fees or administrative costs that you will have to pay for in any case. In the worst-case scenario, the broker might appear to be a scam or these hidden fees might be ten times more than you would have to pay in commission or with spreads.
Why spreads are important while trading ZAR currency pairs?
As we have previously mentioned, the Forex pairs with the lowest spreads are mainly the ones on the list of major or minor currency pairs, as they are the most frequently traded ones. The logic behind this is very simple. The higher the demand the more competition there is on the market, hence, brokers have to lower their costs of trading in order to surpass the competitors. While the majority of the market makers now operate without commissions it means that they have to shrink the difference between their bid and ask prices. However, this does not happen with exotic currency pairs as the demand is much, much lower.
With exotic currency pairs, the spread might be five to ten times higher compared to the major currency pairs. You should not be surprised to observe the spread hitting 40 pip on GBP/ZAR for example if the market conditions are strikingly volatile. Furthermore, you should note that it is much cheaper to trade USD/ZAR than EUR/ZAR and GBP/ZAR in terms of spreads. The most expensive spread among these three currency pairs is undoubtedly GBP/ZAR coming from the fact that GBP itself is not as popular a Forex asset as USD and EUR.
What affects spreads in Forex?
The time of day when trade starts is vital. European trade, for instance, begins in the early morning hours to U.S. traders while Asia closes late at night to U.S. and European investors. If a trade-in euro is scheduled within the Asia trading session, the spread of forex will be significantly greater (and more expensive) than if the transaction was booked in the European session.
If there’s no normal market for the currency there won’t be many participants in that currency, leading to an absence of liquidity. When the marketplace isn’t a liquid one this means that the currency can’t be bought and sold because there aren’t enough participants in the market. This is why brokers who specialize in forex increase their spreads in order to take into account the risk of losing when they cannot escape their positions.
Events in the geopolitical or economic realms can cause forex spreads to widen and vice versa. When the rate of unemployment within the U.S. comes out much higher than expected for instance the dollar’s exchange rate against many currencies could decrease or even lose value. The forex market may move quickly and become extremely unpredictable during times when certain things happen. In the end, spreads for forex can be quite broad during these times because exchange rates fluctuate dramatically (called extreme volatility). Events-driven volatility may be difficult for a forex broker to determine the exchange rate in reality and, as a result, they charge a greater spread to compensate for the risk of losing.