Forex Trading - Fixed Spread vs Variable Spread

A major thing to consider when searching for a prospective Fx broker is the type of spreads they offer. Here's a brief introduction to fixed and variable spreads and methods you can use to choose the better option depending on your trading style.

Before you can commence a business in trading foreign currencies, it is important to comprehend how various Forex brokers price their spreads; that is, the variation between the bid price and ask price. Understanding the difference between fixed spreads and variable spreads can enable you to save a significant amount of your money. Therefore, this should be your major deciding factor when picking your preferred Forex broker. The following review gives a brief description of their differences.

Fixed Spreads

In a fixed spread, the broker always guarantees that the spread will not change regardless of what is taking place in the market. For instance, a broker might inform you that their fixed spread for USD/JPY is three pips per trade. This implies that even when there is high volatility in the market, such as during major news announcements, or when the market is thinly traded, you are still able to enter a trade and pay them three pips on that currency pair.

A major advantage of fixed spreads is that they make entering a trade cost effective, particularly when there is a lot of activity in the market and interbank spreads increase. In this way, fixed spreads provide you with the opportunity of better managing your trade without considering the unpredictable occurrences at the market that tend to increase the costs of entering a trade. In contrast to variable spreads, trading using fixed spreads increases your transactions costs in a thinly traded market.

Variable Spreads

A variable spread tends to fluctuate in a range depending on the market conditions; that is, it would be low sometimes and high at other times. When the liquidity in a market increases, such as the overlap between the London and New York sessions, variable spread increases. And, during low market times, such as at 6 p.m. eastern time [ET], when New York is closed and Asia is not yet fully opened, the difference between the bid price and ask price decreases. Therefore, this makes your trading through variable spreads less expensive on the whole.

However, it comes with the risk of changing market conditions that can increase them at any time. For instance, during low market conditions, the spread for the above-mentioned USD/JPY pair can be lower than three pips, maybe two pips, which makes for less expensive trading costs that is always advantageous. On the other hand, during times of release of significant economic reports, variable spreads tend to widen as the number of orders becomes less in the market.

For instance, during the Non-Farm Payroll announcement in the United States, you can find that the USD/JPY pair has a spread of up to twenty pips. Thus, this makes variable spreads hard to trade with when you are in market conditions that are changeable and mercurial.

Conclusion

While it can be difficult to choose between fixed spreads and variable spreads, the choice you make will rely on your trading style, risk appetite, ability to react favorably in very liquid market conditions, and, ultimately, the speed at which you are able to effectively place orders in your trading station. Nevertheless, it is advantageous to use fixed spreads if you like trading in times of high liquidity in the marketplace, such as during the overlap of two trading sessions or during, or just after, the release of major economic report.

Therefore, you should use fixed spreads when scalping. And, it is advisable you use variable spread if you are a long-term trader who do not like trading during the release of important economic news and data.


In the end, it highly depends on your trading style. If you are a scalper, I possibly could advise a broker with good low fixed spread: 4RunnerForex review. In case you like long-term trading, I would suggest an ECN broker with lower variable spread: AAAFx review.