Trading the Forex market, which involves seeking to take advantage of movements in the exchange rate between two currencies, is one of the most popular ways for retail participants to trade the financial markets.
To get started, you’ll need to choose a Forex broker to buy and sell currency pairs. In exchange for their services, a broker will take a commission on each FX transaction through what’s called the “spread”, which is the difference between the buying and the selling price.
As the spread represents the trading costs for Forex traders, it’s important to know how spreads can be influenced, as it will impact your trading performance over time. Moreover, while some brokers offer variable spreads, others such as easyMarkets, offer fixed spreads, which is why you should take time to do your research to select the right broker for your trading style.
Fixed vs. Variable spreads - Which one should you choose?
As the names imply, fixed spreads remain the same, while variable spreads change depending on trading conditions. While you might be wondering which is best, it all depends on your trading style and the type of currency pairs you trade.
With fixed spreads, Forex traders know in advance their trading costs, which is an advantage for managing costs over time. Fixed spreads are particularly appreciated by traders, as it is easier to plan each trading session. It is also a more transparent option, as you know in advance what you’re going to pay for each FX position, and it also ensures that the Forex broker you’re using isn’t manipulating the spread. Finally, this type of spread is also a good option for those trading volatile markets.
With variable spreads, traders will have to face unpredictable spreads depending on market liquidity and volatility. As spreads can change depending on market conditions, it is more difficult to anticipate the trading cost associated with your trading. However, variable spreads usually provide the best buying and selling prices available at any given moment. Variable spreads are also often cheaper than fixed spreads, especially in volatile and highly liquid markets.
What events can widen or narrow Forex spreads?
The broker isn’t the only variable in widening or narrowing variable spreads, as there are different factors that drive Forex spreads.
The time of day and the kind of currency pairs you’re trading will have an impact on the spread, as this affects the level of liquidity.
If a market is liquid, then it means that there are many traders involved and that it is easy and quick to buy and sell a currency pair at a given price, without this transaction having a large impact on the underlying asset. With a highly liquid market, spreads are usually narrow. On the other hand, if there is a lack of liquidity, brokers usually widen their spreads to cover the risk of loss if they can’t get out of their trades.
The release of economic statistics and indicators can also drive Forex spreads wider, as they can trigger higher volatility. When markets move suddenly, Forex brokers usually widen the spread to account for the additional risk of loss due to market unpredictability.
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