Choosing Fixed or Variable Forex Currency Spreads
By: Terry Allen
You should be aware that governments and large corporations, which possess multi-billion dollar budgets, can generate vicious price spikes just on their own. They can do this as a result of the sheer size and volume of their business transactions without any prior warning to the rest of the Forex market. As such, you need to take such events into consideration when you are calculating the risk:reward ratios for all your present and future Forex trades.
You also must realize that spreads of currency pairs can have a serious impact on your Forex trading performance especially during volatile times. Forex experts pay special attention to this type of information that is quoted by brokers and are very selective in their choice of which agent to use.
In contrast, novices are usually attracted to brokers offering very low spreads (as low as 1 pip) for the EUR/USD and fail to understand the importance of this step. Consequently, they often do not realize that these spreads are variable and will actually increase in size especially during times of high volatility. This is because they either completely miss or do not fully comprehend the important small print associated with these offers.
You need to understand that during very volatile times, such as major news releases, variable spreads have been known to increase in value by 50 pips or more. As such, if you are aware of this problem, then you could find yourself in a very vulnerable position if you use this type of spread.
You could conclude that using variable spreads may not be a very healthy practice over the long haul unless you are operating a well-developed strategy and trading with a fully licensed and registered ECN (Electronic Communication Networks) broker. In addition, you must deploy greater self-control and care during volatile times and subdue all greedy aspirations that you may possess.
As an alternative, you could consider using fixed spreads that never vary in size under any conditions. If you do so, you will have the disadvantage that they tend to have higher values than variable spreads during times of low volatility. As such, they will cost you more when Forex is experiencing tranquil periods. However, you will be able to enjoy the advantage in that you can budget much better because you will have the knowledge that your spread sizes will never change under any trading conditions.