In forex trading, an FX spread is the difference between a currency pair’s buy and sell price. Retail brokers offer a wide range of different spreads, either fixed or variable, based on market conditions, trading platforms, and other factors. These factors include the type and size of the trade, as well as the currency pair being traded.
Fixed spread
A fixed spread, also known as an outright spread, is the same number of pips between a currency pair’s bid/ask prices at all times, regardless of market conditions. Fixed spreads are usually offered on major currency pairs and tend to be wider than variable spreads since they do not change based on market conditions. Variations in fixed spreads include regular or mini lot sizes and whether they are standard or raw spreads (without commission costs).
There are various types of fixed spreads:
Guaranteed stop-loss orders
Guaranteed stop-loss orders are a type of fixed spread, but they guarantee that you will always get the best possible price when your trade is placed. These spreads can help protect against slippage during periods of high volatility.
Fixed trailing stop-loss orders
For traders who want more control over their risk management, fixed trailing stop-loss orders provide a way to reduce risk when prices are moving against the trader’s position. This spread is typically offered by high-end forex brokers and is only available on certain financial assets.
Fixed rollover
Fixed rollovers are spreads that remain the same through a trader’s day trading activity. It allows traders to avoid paying additional costs during periods of low liquidity since their positions will not be “rolled over” into the next day’s session.
Variable spread
A variable spread differs from a fixed spread in that it constantly changes based on market conditions. Typical variable spreads are more comprehensive than fixed spreads, but they may be narrower at times of high volatility. Variations in variable spreads include using regular or mini lot sizes and whether they are standard or raw spreads (without commission costs).
The various types of variable spreads are:
Market spread
Market spreads are usually the most comprehensive and can vary based on market conditions (low liquidity, high volatility) and the level of competition among forex brokers. These spreads tend to be narrower than fixed spreads when liquidity is low but more comprehensive when liquidity is high.
Interbank spread
More advanced forex brokers usually offer interbank spreads with access to global banks’ interbank rates. This spread provides access to the most competitive prices in the market, but it may not always be available since some markets close during weekends and holidays.
Commissions only
A commission-only service allows traders with larger budgets to access even lower spreads by paying a commission fee instead of a spread. This spread is usually unavailable to smaller traders due to the high minimum deposit requirements. Brokers can only offer it with advanced trading platforms with tight connections to central banks and liquidity providers.
Pairs spread
A pair spread is a variable spread that applies to all currency pairs within the same trading platform. This spread usually fluctuates based on market conditions but tends to remain stable in periods of low volatility.
What to consider before getting into spread trading
Assess your risk tolerance and trading goals
Before getting into spread trading, assessing your risk tolerance and overall financial situation is crucial. It will help you determine which spreads are best suited for your needs. For example, if you want to minimise any losses from unexpected market movements, then guaranteed stop-loss orders may be the most suitable option for you.
Check broker requirements and fees
When choosing a forex broker for spread trading, ensure they meet all applicable regulatory requirements and offer competitive fees. Some brokers require higher initial deposit amounts or charge additional fees, so it is essential to do research on multiple brokers before making a decision.
Compare spreads across different currencies and pairs
When selecting a forex broker for spread trading, remember to compare the different spreads offered across currencies and currency pairs. It will help you find the most competitive rates and choose the best option for your needs. For example, if you focus primarily on dollar-denominated assets, it may be worth looking for a broker offering wider US Dollar/Euro spreads.
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