Spread is one of the most important concepts in forex trading. It is the difference between the bid and asking price. While trading forex, you will note that there will be a difference between the current value of the currency and what you pay for it.
That is where the forex brokers make their profit. Let us assume that the current EUR/USD price is 1.27237 and your forex broker offering you a 2 pip (percentage in point) spread, then you will pay 1.2739 when you buy. The higher the spread, the higher you pay while buying and the lower you get on selling.
Generally, the spread is lower in popular currencies like EUR/USD, USD/JPY, EUR/JPY etc. You will find many brokers who would offer a 2 pip spread for these currencies. But there are few equally important factors like speed of execution of orders and the value the order which can really help you in enjoying the advantages of low pips.
Going from a 3-pip spread to a 2-pip spread may sound small, and going from a 2-pip spread to a 1.8-pip spread may seem even less significant. But for both the cases the impact on profitability can be huge. Therefore a forex 2 pip spread sounds perfect in a fast moving financial market like forex.
An online spread calculator may prove to be useful in quantifying and comparing the impact of different spreads. You will have to key in few parameters like trading activity (deals per day, per week, per month, per year), average deal leverage, account equity, current spread in pips, and the calculator will find out the actual spread you are receiving.
If a broker is offering a spread as low as 1 pip, be cautious. As most of the brokers do not charge a commission, it the spread they use to make their money. In a 1 pip spread, there is very little scope for him to make profit.
It may so happen that they are quoting you a price, which is inaccurate. For example, the price is at 1.2000/1.2003. But the broker is quoting you 1.2002/1.2003. So, you go long at 1.2003. On the other hand, if the price goes up to 1.2007/1.2010 and you are quoted 1.2009/1.2010, you may decide to exit. But you get filled at 1.2007, the real price, instead of 1.2009.
So what is more important to you is not a forex 2 pip spread but an honest small spread broker who will pay you the spread he quotes. Make sure there is no slippage or requites. The broker must be regulated and must have proof of past success rates.
See also Forex Broker Reviews Website to discover which brokers offer the lowest trading spreads.