The spread is the total sum of constant or variable pips that shows the difference between the purchase price and the sale price of the financial asset. It is thanks to the spread that forex brokers get their payment.
The lower the spreads, the less margin there is for the broker and the better for you. For example, XTB offers spreads in the average which implies an average but competitive pip compared to other brokers.
It is at the end of the trade that you will automatically have to pay the spread. Under these conditions, a trader must take into account the spread adopted by online brokers. The most practical is a small spread that gives the trader good margins in case the trade is a winner.
There are two types of spreads that are mainly used by brokers, variable and fixed spreads. To choose between variable or fixed spread, it is necessary to take into consideration the trading style of competitors as well as the money management method implemented. It is important to understand the mechanisms of spreads in order to use them to reap the benefits.
The main advantages and disadvantages of fixed spreads
The advantage of fixed spreads is that you can always know the value of the spread you have to pay when you place an order. For a full day, the spread will be invariable in any type of market.
During non-farm payrolls, spreads will always remain the same.
These fixed spreads provide good stability, good assistance to determine trading principles more easily but the most important thing is that their values can be reduced when the market changes.
But be aware that in rare cases such as instability or low volume phases, brokers should not keep spreads unchanged. In addition to this, it is good to know that the fixed spread is higher than the variable spread.
The main advantages and disadvantages of variable spreads
Unlike fixed spreads, variable spreads fluctuate continuously throughout the day depending on market conditions. The more instability there is, the lower the money will be and the higher the spread will be.
During an economic announcement, spreads will widen intensely and will be 4 to 5 times higher than usual with more than a dozen pips for all major players.
During favourable market conditions, variable spreads will for the most part be lower than fixed spreads.
In most cases, variable spreads are used by experienced traders who have a long-term investment strategy and who have the ability to exit the market in the event of excessive instability.