Fixed Spreads versus Variable Spreads
By: Christopher Lewis
When you shop for a Forex broker, you will see a couple of different types of spreads available. One will be the standard “fixed” spread, which means that the spread will remain the same no matter what. The other is a “variable” spread as determined by the marketplace. This can rise or fall depending on what the best bid and offer prices are at the time.
With a fixed spread, the broker guarantees that the spread will always remain the same. This helps the trader plan their trading costs more effectively as they already know how much the bid and offer prices will differ when they place a trade. The spreads will remain the same, even when news announcements are happening, which are a time of extreme volatility. The broker might promise a 3 pip spread on the USD/JPY as an example. This can be useful when you are trading the shorter time frames as the amount you have to overcome in spreads is constant. This allows you to know ahead of time that you need at least 4 pips gained to make a profit against the above example as you trade.
A variable spread simply will pass long the best bid and offer prices that the broker can find for you at any given moment. In times of high liquidity, the spread on these brokers tends to be lower. This makes trading through them cheaper on the whole, but also comes with the risk of market conditions at times. For example, during Asian trading the above mentioned USD/JPY pair might be lower than the 3 pips, perhaps something like 1.8 pips. This makes for cheaper trading costs, which is always a plus. However, during a market announcement the spread might widen as the amount of orders shrink in the marketplace. For example, during the Non-Farm Payroll announcement out of the USA, this pair could very easily have a 20 pip spread. Variable spread brokers are extremely difficult to trade with during times of important news announcements through because of this.
The difference between the two won’t matter as much to longer-term traders though. This is because a higher timeframe trader will place less trades, so a handful of pips lost of gained due to trading costs will be miniscule in the big picture as far as trading results. The spread difference is simply a concern of the shorter-term trader that isn’t aiming for hundreds of pips on every trade. Because of this, some traders will hardly notice the difference. However, if you are trying to scalp the markets – it can make all the difference in the world.