The choice of spreads in forex trading offered by a forex broker becomes a key factor when selecting one because they can either be fixed or variable. What exactly are spreads and how do fixed spreads differ from variable spreads?
This article explores the essential distinctions between fixed and variable spread types while examining the advantages and disadvantages of each.
A solid grasp of how spreads operate enables you to select both an appropriate broker and trading conditions that align with your forex trading strategy.
What Are Fixed Spreads in Forex Trading?
The broker establishes a fixed spread for each forex currency pair that stays constant throughout market changes. With a fixed spread forex broker, you will have precise knowledge of your trading costs before you start trading.
The spread functions as your exclusive expense while staying constant and unchangeable despite market fluctuations.
A EUR/USD pair maintains a constant spread of 1.2 pips which ensures that the spread value cannot vary above or below 1.2 pips for this currency pairing.
Fixed spreads attract traders because they offer cost predictability. Reliable spread figures allow you to efficiently estimate your possible profits or losses. Traders never experience unexpected spread spikes that catch them off guard.
Fixed spreads ensure transparency because they prevent hidden variable spreads from changing without notice.
What Are Variable Spreads in Forex Trading?
Variable spreads change their width as market liquidity and volatility levels change. Variable spread brokers retain the ability to adjust spreads upwards during major news events or when market liquidity drops to cover additional operating costs and risks.
Variable spread brokers narrow their spreads to resemble fixed spread levels during times of market calm. Variable spreads expand significantly whenever market volatility increases.
A EUR/USD spread can vary between 1 pip during unaffected periods to 5 or 10 pips and beyond when major news triggers volatility surges.
The unpredictable nature of variable spreads represents a disadvantage. The main advantage of variable spread brokers lies in their ability to provide extremely tight spreads at times which are tighter than fixed spread brokers can offer.
Variable spread brokers retain the ability to protect their profits in unstable markets by adjusting their spreads when necessary.
What Are the Advantages of Forex Trading with Fixed Spreads?
The key advantages of fixed spreads include:
- Fixed spreads give you precise knowledge of your trade spread thereby eliminating unexpected cost variations. Great for calculating potential profits.
- Traders benefit from transparent spread changes because there's complete clarity about when and how variable spreads alter. The spread quoted is what you pay.
- Fixed spreads provide stable trading environments by maintaining consistency in their values regardless of market fluctuations.
- Fixed spreads work well with automated systems because they maintain stable parameters essential for robots, EA's and algorithms. Variable spreads can disrupt them.
- Fixed spreads eliminate the worry from unpredictable spread increases beyond your control. Fixed spreads eliminate the unpredictable element from your trading process.
Fixed spreads establish an environment of stability and transparency which benefits traders who prefer consistent and predictable costs over the chance of tighter spreads.
BlueSuisse trading platform provides traders with the experience of fixed spread execution. Create your live account from BlueSuisse in just a few steps to enter the world of forex trading professionally.
What Are the Disadvantages of Forex Trading with Fixed Spreads?
The main disadvantages of fixed spreads include:
- Fixed spreads trade off stability by maintaining widths that exceed the narrowest spreads available from variable spreads during periods of market tranquility. You miss out on those optimal spreads.
- Fixed spreads prevent brokers from adjusting their risk exposure through spread changes amid volatile conditions where variable spreads allow such adaptability.
- The profitability of traders may suffer with fixed spreads when they become excessively wide because smaller variable spreads could be beneficial in specific forex pairs or market conditions.
- Variable spread brokers can sometimes offer much narrower spreads than fixed spread brokers during periods of low market activity which can lead to potential trading cost savings.
Fixed spreads eliminate the uncertainty factor but you sacrifice the chance to benefit from the best variable spreads which appear during periods of market stability.
Variable spreads generally lack the aggressiveness seen in the most optimal variable spread offers.
What Are the Advantages of Forex Trading with Variable Spreads?
The potential advantages of variable spreads include:
- Variable brokers sometimes provide exceptional spread rates during low-volatility periods to draw in traders which results in spreads that fall beneath fixed spread levels.
- Brokers maintain operational flexibility by adjusting spreads to manage risks associated with liquidity shortages which helps protect both themselves and traders from market disruptions.
- Variable spreads respond to current market liquidity and order flow which allows traders to receive the best possible pricing for each situation.
- During periods of low market activity ultra-tight spreads occasionally provide significant cost savings against fixed spreads for trading.
Variable spreads provide traders with a better experience during calm market conditions because they offer flexibility along with opportunities to access bargain spreads.
Optimized spreads tailored to conditions represent the main advantage. Create your forex demo account to learn more about spreads with BlueSuisse.
What Are the Disadvantages of Forex Trading with Variable Spreads?
The key disadvantages of variable spreads include:
- The uncertainty in future spread costs creates significant challenges for both trade planning and profit/loss calculations.
- Hidden variable spreads can change secretly without any alert which creates uncertainty because of their lack of transparency.
- When news breaks or liquidity drops, spreads can experience drastic increases which can surprise traders and interfere with their trading strategies.
- Automated trading strategies fail to operate effectively when spreads fluctuate because they require steady parameters to function properly.
- Traders must handle psychological stress because it remains uncertain whether or not a spike will occur.
Variable spreads target cost optimization but suffer from unpredictable spread movements which generate stress and operational challenges during times of forex market volatility when traders are focused on risk management.
Fixed spreads serve as the more dependable forex trading platform during unstable news-driven market conditions. The drawback of fixed spreads is that they prevent traders from experiencing very narrow spreads during exceptionally stable market conditions. It depends on your priorities.
When choosing trading solutions examine your targeted markets and strategies together with your risk tolerance and ability to handle potential spread variations.
Forex traders who operate automated systems show a strong preference for fixed spreads due to their reliability. Experienced discretionary traders tend to prefer variable spreads over other options.
Both spread types offer advantages and disadvantages. Evaluating your personality traits alongside your time frame choices and market perspectives and risk management preferences will guide you to your optimal trading match.
Traders focused on consistency benefit from BlueSuisse because it offers low-stress trading with transparent costs through fixed spreads.