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As a new trade to Forex, or even someone who is experienced in Forex trading, you will always need to make sure you are completely in control of the factors that are going to influence your profit.
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One of those key elements is what kind of Forex Spread you are trading with on your account with whichever broker you have chosen to trade with. Nowadays the competition is so fierce between the brokers that most offer very favourable spreads to their clients so that they are more likely to stay with the same broker.
So let’s take a closer look at what is Forex Spread and find out which type of forex spread account is the best for your trading.
What is Forex Spread?
Forex quotes are provided in a two-way price. The bid and the ask prices.
The bid is always lower than the ask price. This means that as a trader, you can enter the market to buy at a slightly lower price than you would enter as a seller. Before you are going to start making profit, your trade needs to cover this spread. This means that as soon as you open the trade, you will see that you are down the price of the spread, before the asset has even moved a pip. Once this is covered by the asset moving in the favoured direction you start making profit.
Fixed or Floating?
Spreads can be set by brokers and will be in one of two formats, fixed (set) or floating (variable).
Floating Forex Spread
Floating spreads are sensitive to volatility and are subject to change by the broker whenever there is a volatile period in the market like a news announcement or a political event etc. This means that while you are normally trading an asset, let’s say EUR/USD at a 2-pip spread, during a time of high volatility, the spread is more likely to be 6 or even 10 pips. This means that the unaware trader has unwittingly spent a significant amount more on that trade than they otherwise would have. If you are trading at $10 per pip, that could be up to $100 just in spread.
Floating Forex Spread
The alternative is to have a fixed spread. This means that the broker has predetermined the levels at which they are happy to offer the asset to the market. It is essentially an average of what the floating spread would have been over a period of time offered as a constant. So, where a floating spread might range from 2 pips to 10 pips as discussed earlier, a fixed spread might be offered at 3 or 5 pips all the time, depending on the asset.
Which is The Best Forex Spread?
The differences and preferences on a grass roots level for each trader is going to be what kind of trader you are. For example, for a scalper or day trader, it is probably going to make more sense for them to take an account that has fixed spreads because they are very likely to be trading at times of high volatility such as news announcements and economic releases. Using fixed spreads is going to allow these traders to know in advance how much they are going to pay in spread, no matter the market conditions.
A swing or position trader, however, is probably better advised to look at an account that has floating spreads because they are aiming to hold their positions on a much longer time frame and are more likely to already be in a trade when there is a news release or event that is going to cause short term high volatility.
Alternatively, they are more likely to wait until the volatility has left the market and the asset has started to move in a trend or range before entering their trade. A floating account will allow that type of trader to enter the trade at a lower spread than a fixed account would.
[…] For more info on understanding spread, check our this related article What is Spread?. […]