The forex spread is the difference between the asking and bid prices of a currency pair. For instance, if the GBP/USD trade pair has a price of 1.99846/1.99841, it’s spread would be 5 pips. However there is more to a spread than just simple subtraction.
When you go into a trade, your broker will let you choose between a fixed or a variable spread to use on your trading platform. At a fixed spread platform, the spread will remain constant regardless of the movement in the forex market. A variable spread on the other hand will fluctuate in response to the market condition. Although a variable spread provides you with a bigger chance for a bigger profit, there are certain benefits to using a fixed spread that make it the most practical choice for traders.
1) High level of transparency
When using a fixed spread, both you and your broker will enjoy a high level of transparency during the trades. With a fixed forex spread, your broker will not have any opportunity to “play the spread” and other unethical practices to profit from you. There are actually a lot of brokers who will make their own market and increase the spread, which is usually bad news for you and good news for your broker because he can use it when trading against you.
2) Easy automated trading
Automated trading is not really possible with variable spreads because of forex robots. With a fixed spread, all the trading robot needs to do is to wait until your trades hit a certain number and it will execute a pre-programmed command that will ensure a profit; or stop you from losing more money than expected. With variable spreads, you need to keep a close eye on the marketplace because automated trading robots cannot act the way that you expect and this usually means massive losses on your end.
3) Easy news trading
Variable spreads are not really suited for news trading because they will considerably widen up even before any big news can affect the forex market, which as you might have guessed, will lead to massive losses on your part. Fixed spreads are better for news trading because they will never change whatever kind of news happens.
You need to understand forex spreads before you even think about going into currency trading. If you have intimate knowledge about spreads, then you can use them to turn a profit. Knowing about spreads can also help prevent your broker from using unethical practices to cheat you off of your money. So even before you open up a forex trading account, you should brush up on fixed spreads and how you can make the best use of them.
Author: Zahir from Admiral Markets Australia
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