Differences between forex broker prices can mean more losing or winning trades, and may also dramatically affect performance if following trade signals, analysis, or automated software.
The forex market is an uncentralized exchange, and therefore, each broker will have different liquidity providers, a different number of traders (meaning more or less volume) and slightly different prices at times. These slight differences may affect trader performance, especially if that trader is following signals or trying to use automated software created by someone else.
I am not a fan of forex trade signals or buying automated strategies online, and below are a few more reasons to avoid them. Learn how to trade for yourself instead. I occasionally provide forex trade examples for educational purposes, but these are not to be viewed as trade signals. Why is discussed below.
Differences in Forex Broker Prices
Most of us have done our research to try to find the best forex broker for our particular strategies, and if you haven’t you should. While a good broker won’t save you from bad trading, a bad broker can make a good trader unprofitable.
Back in 2014, there was an article in the now disappeared Currency Trader magazine which discussed discrepancies in price between large regulated forex brokers. They found that there was typically a 1.09% difference between the high and low prices provided by these various brokers. This is noteworthy but amounts to about one pip difference in a pair that moves on average 100 pips per day. If a pair moves 50 pips a day, a 1% difference is 0.5 pips. This is the price difference between large and regulated brokers. Smaller brokers may see much bigger price variance.
The impact of even a 1% difference in price movement between brokers becomes larger as we drop down to lower time frames. A one pip difference on an hourly chart is akin to about 4.85% of the price range over that hour, on a 5-minute bar it equates to about 7.2% the price range for that time frame, and on a 1-minute bar the price difference could be 21%.
For example, if the price is moving 5 pips in one minute with most brokers, but with another broker it is moving 6 pips or 4 pips, that one pip difference is a 20% variation from the “real or competitive price” provided by the bulk of other brokers. Some variance is of course expected among all brokers, because as discussed it is an uncentralized exchange. Yet if you watch the quote comparison tool on Myfxbook, you will see some brokers that continually offer worse bids and offers than most other brokers.
It is not uncommon to see a 0.5 to 1 pip differences in price between brokers at any given moment. If we trade with a broker that is routinely outside the norm of other brokers, this will affect us in at least a couple of ways.
Why Differences in Forex Broker Prices Is Problematic
The broker you choose can greatly affect profitability in your own trading.
Especially when short-term trading (using 1 or 5-minute bars, for example), a pip difference every once in a while means the difference between getting stopped out and remaining in the trade, or hitting your target or narrowly missing it. Over a great many trades those near misses or pre-mature stop-outs can turn a slight edge into a losing strategy.
While the price moving an extra pip beyond what you would have gotten with another broker, or moving a pip less, may help you out occasionally, you can be certain this isn’t being done for your benefit. If a broker doesn’t have enough liquidity to maintain competitive bids and offers, this will eventually hurt you in the long-run in terms of slippage on orders (getting different prices than you expect), partial fills on positions, getting stopped out by a hair and then the price moving back in your direction, or the price nearing your target but not filling it.
The next thing to consider is the proliferation of trading robots, automated strategies, and expert advisors that are sold today.
While many of these fail to work in the first place and are a waste of money, most traders don’t consider that a strategy (especially a short-term one) that works with one forex broker may not work on another. Broker price differences are also not the only thing to consider here. I have noticed “latency” issues (the time delay between placing an order and when it become live) with several brokers, meaning your order fills at a slightly different price than it would with a broker with no latency issues. Again, a slight difference over a great many trades will greatly impact trading performance.
If your broker is a bit slower to fill your orders than another, that is a variable no signal provider or automated strategy can take into account. If a signal provider says buy on a breakout above 1.5250, and that signal provider has a highly liquid broker that executes trades instantaneously, he may be able to enter at a price of 1.52502 (2/10 of a pip above the breakout). If your broker is less liquid or is slow to fill orders, you may end up getting in at 1.5251 (one full pip above breakout) or 1.5152 (almost two pips worse). On a short-term trade, one or two pips is a huge difference. Over many traders, if you consistently get worse fills than the signal provider, you will never be able to match their returns. Similarly, if you trade on your own and have a tendency to notice or execute trades a bit late, you too will struggle to be profitable.
The greater a broker’s price deviates from other brokers, the harder to follow trade signals in the first place. 1.5250 is obviously a significant level to the signal provider above…possibly the top of a range. But if your broker has more relaxed quotes, the high of YOUR range may be 1.5251, or 1.5249. In this case, 1.5250 isn’t important to you. You actually want to be watching for the breakout of whatever the significant price is on YOUR chart. This could be different than the signal provider’s chart. If your high is 1.5251, and you follow the signal providers advice and enter at 1.5250, you are entering too early. The price hasn’t actually moved to the equivalent trigger level on your chart. You may end up in this trade, and if the price drops you lose money while the signal provider may have never been triggered into the trade in the first place.
The same thing could happen even if viewing analysis online, on TV, or in the news. The important prices the analyst uses may be a pip or two different than the important price levels on your chart. This also happens when I post a trade idea for educational purposes. I provide the trade levels I am trading at, but I always state that it should be not used as a trade signal. It is better to understand why the trade is taking place, and that way you execute the trade at the proper price on your chart. The educational “how and why” is far more important than the actual prices provides, because the prices are likely slightly different on your chart anyway.
As for automated strategies, many day trading ones that I have seen take a lot of trades each day trying to grab small one to five profits over and over again. No doubt the sellers of these robots have lots of backtested data to show how profitable the robot is. Aside from the problems of optimized strategies based on historical data (once we know the future, we can create something that works wonderfully on past data), these robots are often tested under ideal conditions assuming instant execution and no slippage. That simply isn’t possible in the real world. Even a great broker won’t be able to replicate the perfect demo trading conditions most of these robots are tested under.
In a demo account, there is usually infinite liquidity (if the price trades at that level, you get that price, no matter how big your position size), which means no slippage and tight spreads. Even if an automated strategy does work well in the real world for the person who created it, in order for it to work for you your broker would likely need to be the same as theirs. If the strategy creator has a smaller spread than you, smaller commissions, less slippage, or a broker with more liquidity, these all could ultimately make you unprofitable even though the strategy is working wonderfully for the creator.
While I don’t like signal providers or any automated strategies you buy off the internet (creating your own, based on your own time-tested methods is different), if are going to use them–but don’t–make sure you at least use a broker that has similar conditions to what the signal provider or automated strategy creator uses.
Final Word on Price Differences Between Forex Brokers
The bottom line is that you should always calibrate your strategies and decisions based on the broker you use. If you buy or develop a short-term strategy based on someone else’s work, you may need to alter it slightly to accommodate your broker. Keep in mind, the brokers used in the price difference study where large and regulated. If you trade with a small unregulated broker, it is likely to have fewer liquidity sources, which means latency issues and price difference could increase dramatically compared to other brokers. It is best to learn how to trade forex for yourself, and not try to trade off forex price levels published by others. Their important levels may be slightly different than the important price levels on YOUR chart.
If you are concerned about your broker providing uncompetitive prices, test out some others. If you notice significantly different highs and lows on the price bars (especially intraday bars), you may have a problem you need to address….but only if you feel it has negatively affected performance. Of course, there is also the spread and commissions which can greatly impact performance. The larger the spread and/or commissions the harder it is to make a profit.
Also, be sure to test your own strategies and trade them on the same broker. If someone else tested a short-term strategy for you, using a different broker, the live results with your broker are likely to vary. Similarly, if you use one forex broker for testing a strategy but then use a different broker for live trading, expect different results.
I use a broker called FXopen. I have been with them for years. Their spreads are competitive, I have not had slippage issues, their commissions are low, and their rollover rates are competitive. They are not the least expensive in some of these categories, but that is ok. A broker that doesn’t charge enough is the riskiest of all, because if they aren’t making any money they go out of business and you may lose everything. You want a fair broker that allows you trade, how you want to trade, on a competitive playing field. Go too expensive or too cheap with a forex broker and you will pay dearly.
By Cory Mitchell, CMT
Check out my Forex Strategies Guide for Day and Swing Traders eBook.
Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your skill step-by-step.