Fixed Spreads vs. Variable Spreads

Filed under: Learn Forex Trading |

Today, I want to tackle one of the less glamorous aspects of forex trading, but an aspect that nevertheless needs to be covered. This is the issue of choosing a broker who offers fixed spreads verses one that offers variable spreads.

 

To begin with, for those of you that don’t know, the ‘spread’ is the difference between the buy price and the sell price in the forex market. For example, on my current trading platform on the GBP/USD pair, the buy price is currently 1.6228 and the sell price is 1.6226. The difference between the buy and sell price is thus 2 pips, so the spread is therefore 2 pips.

 

The trading platform that I am currently using (Go Markets) can have the spread for this GBP/USD pair anything from 0.5 pips to 3 pips. This is what is known as a variable spread because the spread moves around depending on the market conditions.

 

Another forex broker that I am currently using (Easy-Forex) as a trial has the spread on the GBP/USD pair at 4 pips. This spread is fixed at 4 pips and is thus always 4 pips, regardless of the market conditions.

 

Now, you might think that this is a no-brainer, and to a certain extent, it is. The spreads at Go Markets are on average much lower than those at Easy-Forex. However, during times of great market volatility, the spread can widen immeasurably. Many traders do not like this uncertainty, and would much prefer a fixed spread that they can rely on, even if it is not quite as good, on average.

 

Personally, I would still prefer a lower variable spread than a higher fixed spread, but this is merely my own preference. However, the spread does eat into your profits more than you can imagine, and as such, we really need all the help that we can get.

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