Forex Trading - Fixed Spread vs Variable Spread

A major thing to consider when searching for a prospective Forex broker would be the type of spreads they provide. Here's a brief overview of fixed and variable spreads and methods you may use to select the better choice 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. Here are a few pros and cons of each type

Fixed Spreads

Fixed spreads always remain the same in spite of the conditions at the marketplace. 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.

Using fixed spread to trade is cost effective, especially when you are trading in volatile market conditions when the interbank spreads tend to widen. 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. On the contrary, when you trade using fixed spreads, you are likely to increase your transaction costs when you are in a market with low liquidity.

Variable Spreads

In a variable spread, the broker always ensures that the spread changes based on the conditions in the market; it would be either high or high. 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. Thus, trading through variable spreads is generally able to guarantee you low transaction costs.

However, it comes with the risk of changing market conditions that can increase them at any time. For example, in times of low liquidity, the spread for the aforementioned EURO/USD pair can be less than 2 pips, may be 1.8, which makes for low-priced transaction costs that can prove to be of great benefit to your trading. 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.

As an example, during the monthly release of the U.S. Non-Farm Payroll data, you can observe that the EURO/USD pair has a spread of ten pips. Therefore, this makes variable spreads difficult to trade with especially when you want to trade during unpredictable market conditions, as it would mean incurring more transaction costs.

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.

Thus, fixed spreads are best suited for 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 really depends upon your trading style. If you are a scalper, I could advise a broker with very good low fixed spread: 4RunnerForex broker. In case you like long-term trading, I'd recommend an ECN broker with lower variable spread: a review of AAAFX.