Fixed spreads help traders know their bottom line i.e. their spread cost, regardless of market conditions. No matter what the market’s liquidity or volatility is, easyMarkets spreads remain stable. Even during Bitcoin’s historic bull run, when it reached $20,000 – easyMarkets not only continued offering the cryptocurrency but kept its spreads unchanged.
A spread is the difference between the ask and bid price. In simple terms think of it as a retailer that purchases a product at a wholesale price and then sells it for a little bit more. Some brokers adjust this spread between the ask and bid price depending on volatility, meaning if markets are volatile your spread might be different for every trade you place within that period.
A complicated formula is usually necessary to calculate these variable spreads.
Fixed spreads on the other hand allow you to know your spread cost beforehand and develop your strategy (either long-term or daily) simply. This allows for better price transparency and ultimately a more predictable cost assessment before you even start trading.
Although Fixed spreads do not change, they do differ from instrument to instrument. Variable spreads can reveal the liquidity of a market.
This is due to certain factors such as:
In forex trading, spreads are of two types: variable or fixed.
A variable or floating spread is a constantly changing value between the ask and bid prices2. In other words, the spread you pay for purchasing a currency pair fluctuates because of things like supply, demand and total trading activity.
Brokers promising tight spreads typically offer variable spreads. Although it’s certainly possible that the actual spread you pay for matches the one advertised by the broker, this is not always the case. In general, spreads are usually tighter during active trading sessions where liquidity is optimal. A prime example of this is the London-New York overlap3.
After all, variable spreads are characterized as a “completely market phenomenon.”4
Unlike variable spreads, fixed spreads are set by the broker and don’t change regardless of market conditions or volatility. The spread you are offered is the spread you pay.
Although variable spreads marketed at 0.1 pip look more appealing, fixed spreads can potentially save you more money throughout the course of your career. Below are five advantages of fixed spreads in forex.
In forex, fixed spreads mean transparent costs. You know exactly what you’re going to pay for each time you trade, regardless of interbank liquidity, time of day or trading volumes. This ensures that brokers can’t manipulate the spreads in their favour.
By applying fixed spreads, you can greatly reduce the cost of trading. Fixed spreads offer no surprises, ensuring you can budget the costs of transactions well in advance. This will greatly improve your ability to manage costs over the course of your trading career.
Volatility in the forex market has become commonplace and isn’t limited to news events. While variable spreads may be beneficial during quieter market times, fixed spreads are ideal for volatile market conditions5, which just also happen to potentially provide more opportunities to take advantage of.
Unfortunately, variable spread accounts can make news trading very confusing because of how wide the bid and ask fluctuate. By using a fixed spread, traders may approach news trading as they would any other market condition.
Short term forex trading strategies involve making numerious trades in a short period of time – is much easier and more predictable using fixed spreads. Due to the nature of this strategy the potential gains can be small, so using fixed spreads ensures a higher level of price transparency.