The Advantages of Fixed Spreads

In today’s Forex markets, many brokers will try to sell the trader ‘Low

The Advantages of Fixed Spreads

In today’s Forex markets, many brokers will try to sell the trader ‘Low spreads’ from ‘as low as 0.1’ pips. What is not mentioned, though is that the 0.1 pip spread that was promised does not apply to most of the trades due to factors such as liquidity, and trading volumes.

The Bid/Ask spread (or spread for short) is one of the most important (as well as one of the simplest) elements of trading in the Forex markets. Spread is the difference between the highest that a trader is willing to buy at, and lowest price that the trader is willing to sell at, of the bid, and ask respectively.

 

What is a fixed bid/ask spread?

Spreads can be influenced by a number of factors, including:

  • Supply of a particular security (i.e. the number of securities available to trade)
  • Demand for a particular security (i.e. the number of traders seeking to buy the security)
  • The total trading activity of the underlying asset.

For these reasons, the spread is considered a key measure of overall market liquidity.

 

Variable vs. fixed spreads

In Forex trading, spreads are separated into two categories; variable and fixed.

A variable spread (or floating spread) is an ever-changing value between the ask and bid prices; in other words, spread that is paid for purchasing a currency pair fluctuates due to the supply, demand and aggregate trading activity; brokers promising tight spreads typically offer variable spreads; although it is definitely possible that the actual spread that is paid by the trader, matches what is on offer by the broker in question, it is not always the case. in general, spreads are usually tighter during active trading sessions where liquidity is optimal; a prime example of this is the London-New York overlap; variable spreads are categorized as a complete market phenomenon.

 

The 5 Advantages of Fixed Spreads

Unlike variable spreads, fixed spreads are set by the broker and don’t change regardless of market conditions or volatility. The spread you are offered is the spread you pay.

 

Although variable spreads marketed at 0.1 pip look more appealing, fixed spreads can potentially save you more money throughout the course of your career. Below are five advantages of fixed spreads in forex.

 

1. More transparency
In forex, fixed spreads mean transparent costs. You know exactly what you’re going to pay for each time you trade, regardless of interbank liquidity, time of day or trading volumes. This ensures that brokers can’t manipulate the spreads in their favor.

 

2.Lower costs
By applying fixed spreads, you can greatly reduce the cost of trading. Fixed spreads offer no surprises, ensuring you can budget the costs of transactions well in advance. This will greatly improve your ability to manage costs over the course of your trading career.

 

3.Easier news trading
Volatility in the forex market has become commonplace and isn’t limited to news events. While variable spreads may be beneficial during quieter market times, fixed spreads are ideal for volatile market conditions, which just also happen to provide more opportunities to make money.

 

4. Safeguard against volatility
Trading the news is one of the most effective ways to make money in the forex market. Unfortunately, variable spread accounts can make news trading very confusing because of how wide the bid and ask fluctuate. By using a fixed spread, traders may approach news trading as they would any other market condition.

 

5. More effective scalping
Scalping – a forex trading strategy in which a trader makes a large number of trades in a short period of time to earn a small profit each time– is much easier and more predictable using fixed spreads. Because scalpers often make money on very narrow profit margins, using fixed spreads ensures that the difference between the bid and ask levels don’t change too drastically.

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