FOREX: Fixed Spreads vs Variable Spreads

If you are planning on getting involved in the Forex market, it is important that you understand Forex spreads and how they work. You need to understand the difference between fixed and variable spreads. Here are a few things to consider about each type of spread.

The Spread

The spread in the Forex market is the difference between the bid price and the ask price. The seller of a particular trade is always trying to get the highest price that they possibly can. The buyer is always trying to get the lowest price. The difference between these two prices is known as the spread. In the world of Forex, the broker is going to keep the spread from each trade. This is how they are compensated and it can directly affect your bottom line. It is going to take a certain amount of the profit from each trade.

Fixed vs Variable

In the Forex market, there are two types of spreads that you will have to become familiar with. A fixed spread is going to be the same for a currency pair regardless of what is going on in the market. For example, a broker might tell you that they always have a low, fixed spread on the EUR/USD market of 1 pip. This means that even if there is not a lot of trading going on in the market, you can still place a trade and only pay them 1 pip on that pair. Many brokers that have fixed spreads will have a different spread for each currency pair.

Variable spreads will fluctuate with market conditions. With this type of spread, it will be low sometimes and high at other times. Typically, during the busiest periods of the market, the spread is going to be much lower than during the slow times. Therefore, with variable spreads, you should try to trade during the London and New York sessions if you want low spreads.

Providing Fixed Spreads

When a broker provides fixed spreads, they are essentially filtering the raw data that is coming in from the market. You know that every trade takes place is not going to have the same exact spread. Because of this, brokers that offer fixed spreads between the actual spread and their fixed spread. If the spreads are lower than what their fixed spread is, they will keep the difference. In this way, they can level out the spread and still make money.

Providing Variable Spreads

Brokers that provide variable spreads are giving you a direct feed into the Forex market. If you want to work with a real broker that processes your orders directly into the market, you will have to deal with variable spreads in most cases. This can make your trading a bit unpredictable, but it is giving you direct access to the market.