Understanding Forex Broker Spreads

Understanding Forex Broker Spreads

If you are looking to get started in actively trading the forex markets (or even in any of the other financial markets), you will need some idea of the costs and risks that are involved.  This can be difficult for some traders because in the newest stages of trading, investors are typically focused on the potential for profits and not the potential for losses.  This can make things very complicated if you start to see a string of losses, so it is critically important for all new forex traders to find ways of limiting regular trading costs.

Fixed and Variable Spreads

When dealing with forex, the major cost involved comes with the need for forex brokers to charge a spread cost in each trade.  These are the costs that are required in order to provide access to the market, and the charges can change depending on whether your broker deals with fixed or variable spreads.  These costs can also change depending on the type of currency pair you are trading.  So, if you are trading in highly liquid pairs like the EUR/USD or the GBP/JPY, your trading costs are going to be lower than they would be if you were trading in the AUD/NZD or in the USD/ZAR.  

During periods of high market volatility, spreads tend to widen when trades are opened.  This is something that has been underscored in recent sector reports from Mocaz Financial Markets Limited, and I will give a further review of these factors in my next article for this site.  In any case, you will need to assess your own trading style in order to determine which type of spread cost is most appropriate for your trading needs.  

So if your trades tend to be shorter term in nature (ie. day trading or news trading) it is generally a better idea to select fixed spreads so that costs to not become an extreme drag on your trading account.  If your trades are longer term in nature, then you can actually reduce your costs by trading during period of lower price volatility (as this is when variable spreads tend to tighten greatly).  

In all, spread costs are something that will need to be considered before any real money trades are placed.  Assess your individual goals when trading in order to select the framework that works best for your investment goals.