What are Forex Spreads and How They Can Affect You?

When choosing a forex broker it’s important to research how they price their forex spreads. Over time, the spread that a trader pays can have a direct impact on their bottom line.[1]

Most brokers offer two types of spreads – variable or fixed. The one you pick should ultimately reflect your trading style, trading frequency and underlying objectives.

What Is a Forex Spread, Anyway?

In the forex market, a spread is essentially the cost of trading a particular currency pair or asset. It is literally the difference in pips between the bid price and the ask price of a currency pair, such as the EUR/USD or GBP/USD. Brokers use spreads to get compensated for each transaction that a trader makes on their platform.

In general, the bid is the highest price a trader is willing to buy, whereas the ask is the minimum price the trader is willing to sell.[2]

For example, if the EUR/USD is currently priced at 1.1400, the broker will let you buy it at 1.1402 and sell it at 1.1398. That represents a spread of 2 pips. Those 2 pips are the price you pay for transacting on that platform.

Fixed vs Variable Forex Spread

When it comes to choosing a forex platform, traders need to consider the type spread the broker offers. Fixed spreads are predetermined and do not change regardless of trading conditions. In the above example, the spread on the EUR/USD is 2 pips. In a fixed spread environment, it would remain 2 pips regardless of when the trader is placing an order.

Fixed spreads offer a distinct advantage in that the cost of trading remains consistent regardless of market volatility.

As the name implies, variable spreads fluctuate throughout the day, depending on broader market conditions. In this environment, the difference between the buy and sell price of a currency pair fluctuates in a range. The more volatile the market conditions, the wider the spread becomes.

For traders who like to access the market during volatile hours or news releases, the variable spread can prove quite costly.

Choosing between fixed and variable spreads comes down to understanding your trading style. In general, traders tend to prefer a fixed spread environment because it is more predictable, allowing them to accurately keep track of their trading costs.

[1] Hans Nilsson (30 September 2008). “Fixed Spreads Vs Variable Spreads.” FXStreet.

[2] Andres Salazar (1 March 2016). “What is a Spread and Why Does it Matter?” Finance Magnates.

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