A major consideration when searching for a potential Forex broker would be the type of spreads they provide. Here's a brief overview of fixed and variable spreads and techniques you may use to choose the better choice depending on your trading style.

When you are planning to start a business in Forex trading, it is of essence to understand how the many brokerage firms available out there price their spreads (the difference between the bid price and ask price). Comprehending the distinction between fixed spread and variable spread can considerably reduce your trading costs. Therefore, this should be your major deciding factor when picking your preferred Forex broker. The following review gives a brief description of their differences.

Fixed Spreads

In a fixed spread, the broker always guarantees that the spread will not change regardless of what is taking place in the market. For instance, a broker might inform you that their fixed spread for USD/JPY is three pips per trade. This implies that even when there is high volatility in the market, such as during major news announcements, or when the market is thinly traded, you are still able to enter a trade and pay them three pips on that currency pair.

Using fixed spread to trade is cost effective, especially when you are trading in volatile market conditions when the interbank spreads tend to widen. In this way, fixed spreads provide you with the opportunity of better managing your trade without considering the unpredictable occurrences at the market that tend to increase the costs of entering a trade. In contrast to variable spreads, trading using fixed spreads increases your transactions costs in a thinly traded market.

Variable Spreads

A variable spread tends to fluctuate in a range depending on the market conditions; that is, it would be low sometimes and high at other times. During times of high activity in the market, for example, when the London and the New York sessions overlap from 8:00-12:00 EDT, variable spread tend to widen. And, during low market times, such as at 6 p.m. eastern time [ET], when New York is closed and Asia is not yet fully opened, the difference between the bid price and ask price decreases. Therefore, this makes your trading through variable spreads less expensive on the whole.

However, it comes with the risk of changing market conditions that can increase them at any time. For instance, during low market conditions, the spread for the above-mentioned USD/JPY pair can be lower than three pips, maybe two pips, which makes for less expensive trading costs that is always advantageous. Conversely, during times of important news releases, variable spreads increases as the quantity of orders reduces in the marketplace.

As an example, during the monthly release of the U.S. Non-Farm Payroll data, you can observe that the EURO/USD pair has a spread of ten pips. Therefore, this makes variable spreads difficult to trade with especially when you want to trade during unpredictable market conditions, as it would mean incurring more transaction costs.

Conclusion

While it can be difficult to choose between fixed spreads and variable spreads, the choice you make will rely on your trading style, risk appetite, ability to react favorably in very liquid market conditions, and, ultimately, the speed at which you are able to effectively place orders in your trading station. Nevertheless, it is advantageous to use fixed spreads if you like trading in times of high liquidity in the marketplace, such as during the overlap of two trading sessions or during, or just after, the release of major economic report.

Thus, fixed spreads are best suited for scalping. And, it is advisable you use variable spread if you are a long-term trader who do not like trading during the release of important economic news and data.