One milestone goal when choosing a potential broker related to Forex is to select an appropriate spread type that they provide. The following is a set of basic instructions on how to select the proper fixed or variable spread types and techniques that can be used in order to make sure you made a good choice depending on your trade method and type.
In the basic, your primary milestone should be to enable yourself international currencies trading. However, it is of uttermost importance to make sure how various brokers related to Forex do the pricing related to their spreads (bidding price – asking price relation). Making sense and a good strategy in the relation between variable spread and fixed spread may help you lower your trade expenses. Hence, the above-mentioned is advised to be your primary criteria when selecting an appropriate Forex broker.
Fixed Spread method
The method representing a fixed spread strategy is basically a method where the broker guarantees the spread value is not going to change in relation to the market fluctuation. For example, your designated broker would inform you of their spread being a fixed one for the United States Dollar / Japanese Yen, with 3 pips/trade. Means mentioned above that regardless of the eventual changes on the market (for example – Major global events and announcements), or otherwise when a trade on the market decreases, the broker would still enable you to enter the trade by paying 3 pips/trade in relation to the designated currency pair.
The fixed spread method is profitable, best seen in a situation where you commence the trading procedure in a volatile and / or unstable market situation when there is a tendency of an interbank spread widening.
Fixed spreads enables us to organize more appropriately in relation to the trade regardless of the situation at the marketplace, that is sometimes inflating the transaction charges. However, if you are trading using the fixed spread method, you will probably increase the transaction costs while trading on a low-liquidity market.
Variable Spread method
Method representing the variable spread strategy is fundamentally a method where the spreads fluctuate to a certain amount, dictated by the conditions on the specific market. The spread values would sometimes be lower and sometimes higher, respectively. When there is an increased liquidity on the market, for example – overlapping between New York and London based sessions, the variable spread value increases. Moreover, during the market cooling period, for example at 6:00 PM Eastern Standard Time, when the New York-based sessions are closed, and sessions in Asia are yet to open completely, the different values between the bidding price and asking price tends to decrease. The described situation enables your trading with variable spreads to be significantly cheaper.
Please also be noted, when trading with variable spreads, the trading comes with a risk of certain market fluctuation conditions. Hence they may get instantly widen as a coincidence. For example, in the decreased market conditions, United States Dollar / Japanese Yen spreads pair may be at the lower value than 3 pips, making them cheaper for trading. However, during above mentioned major global events and announcements, variable spread value increases in correlation to the decreased quantity of marketplace orders.
For example. At the time of releasing the USA Non – Farm Payroll data, Euro – United States Dollar pair has the spread at the value of 10 pips. Hence, the situation creates the situation where variable spreads are hard to commerce with, especially if you decide to trade in time of certain erratic market situations.
The process of deciding whether you choose the Fixed or Variable spreads, your choice should lean on the trading style, the ability for favorable reaction in very liquid conditions on the market, willingness to take a risk, and finally, your specific speed of activities related to the order placing the procedure in your trade-station.
Finally, it is advised to select fixed spread type when trading during swift activity on the market, especially when you encounter the overlap of 2 sessions, or alternatively during a release of certain important data.