All about the spread....Variable, Fixed, Mixed?!

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Spreads in the forex market are very important to most all traders.  The bid/ask spread is the cost of doing business associated with most all forex trading transactions.  People who are new to forex should know that every trade they place will be in the negative right away because of the spread itself.  The brokerage firm earns a part of the spread and another portion is their cost for putting your trade into the market.  Larger account sizes will give the trader the power to gain a much lower spread and most companies offer a flat commission for each trade on larger accounts as well.  The vast majority of traders, however, will pay this price for each trade enter, whether buying or selling.

Generally, the most liquid, or commonly traded, currency pairs have the lowest spread, while the more rare (exotic) pairs have a higher price to trade.  A common spread is 1.0 to 2.0 pips on the EURUSD pair, if you are paying less than this you are getting a great deal, but if you are paying much more you are not getting the best price.  Please note; if you trade longer term charts and only trade a few times per week in search of larger pip moves, the small spread may not be that much of a factor to your account, but if you trade frequently you will soon learn how expensive trading can become.

Most brokerage firms today have 5th decimal place pricing and floating, variable spreads.  This is nice to see most times unless there is high volatility in the market, like for example, during news events.  If your brokerage has variable spreads, they may increase them 2, 3, even up to 10 more times during these times....which of course can be dangerous to your account.  It is advisable to remain out of the markets during most critical news events for this reason alone.  For example, if you have a 25 pip stop on a pair and there is a major news release, the price may move violently for a short time and the spread may widen and hit your protective stop loss and give you a negative trade result, only to continue in your favor if the spreads would not have widened.

Some brokers have fixed spreads at all times.  Usually, but not always, their spreads are larger than other companies, but they are stable during all news releases, as well as when the markets close at the end of the week and open again 2 days later.  Trading with a fixed spread has many advantages as long as their prices are not much greater than a brokerage with variable spreads during normal trading times.  One of our partner companies, Tadawul Fx, has fixed spreads, which become lower with larger account size.