When looking for a broker and a platform to trade on, it is a good idea to research whether their spreads are fixed or variable (or floating). In addition, it is important to determine how the broker prices their spreads. The spreads that a trader pays over the course of time can be significant to the traders’ bottom line and should be a factor when considering a Forex broker.
Typically, Forex brokers provide two types of trade spreads, fixed or variable. Money earned through Forex trading is not an easy proposition, so, which is the better option? Opinions tend to vary amongst traders which are usually correlated to the trading style of the individual trader.
To get a better understanding of why a trader would want to utilize one spread verses the other let’s look at the difference between the two.
Fixed spreads are predetermined and remain static where as variable spreads tend to widen during major events or news releases. The beauty behind fixed spreads is that during volatile trading sessions, which may be caused by events such as news releases, the spreads do not widen.
Fixed spreads tend to be wider than variable spreads and are usually between 2-3 pips. Even though fixed spreads tend to be wider than those of variable spreads a trader has comfort knowing that the predetermined fixed spread is predictable and will not vary. Variable spreads might go as low as 0.5 pips but could widen to anywhere as high as 8 or more pips.
How does the spread affect my bottom line?
One of the difficult numbers to calculate when creating a trading strategy is the slippage that may take place when trading a currency pair. If for example you are using a scalping strategy when trading and you are attempting to take a small amount out of the market on every trade, you invariably need to rely on constant spreads to succeed. For example, if your trading strategy calls for removing 20 pips out of the market, you want to be able to calculate your costs knowing what spread your broker will take in advance.
Again, when relying on a trading strategy it may be easier to predict or determine what your bottom line may look like when utilizing fixed spreads verses variable spreads. Another benefit to utilizing the predictability of fixed spreads might be through automated trading strategies and trading bots. The fixed spreads provide a level of transparency while variable spreads do not.