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The Basics of the Forex Brokers Spreads

This article looks at the spreads that forex brokers offer you in relation to the schemes and the currency pairs.

Forex Brokers Spreads

When you look at the forex brokers that you can use you need to look at the spreads that you are offered.  The spreads will play a role in the way that you trade and the profits that you are able to make.  Ideally, you will want to get the tightest spreads possible.  However, this is not always something that you can do and you have to consider the alternatives.  When you look at the forex brokers spreads you should consider the scheme that is being used and the currency pairs that you are going to trade.  This will affect the spreads that you are offered.

The Forex Brokers Spread Scheme

The first point that you have to consider when you look at the forex brokers and the spreads they offer is the type of spread scheme they are using.  Retail brokers have two schemes that will commonly be used.  The first scheme is the fixed spread and the second is the variable spread.  The way that these spreads work are quite different and you need to know about this.

The fixed spread will be a set amount that does not change at any time.  The spread you are going to get will be the same regardless of the time and the market conditions.  There are many traders who feel that this is the best spread to get because you will always know what you are being charged.  This will help you calculate the profits and losses that you can make on a trade with more accuracy.

The variable spread will change depending on the market conditions.  When the market is doing well the spreads will generally be tighter.  Of course, there are times when the market is doing well and the spreads widen.  The variable scheme is the most commonly used of the two and you should keep this in mind.

The Currency Pairs You Trade

When you trade on the forex market you have to use currency pairs.  The currency pairs that you are going to be trading will vary depending on your strategy and the level of experience that you have.  The currency pairs will also affect the spreads you are going to get.  While forex brokers cannot change the scheme they use for the different currency pairs they can change the way they are viewed.

There are two types of currency pairs that you can trade with and they are the commonly traded pairs and the exotic currency pairs.  The commonly traded currency pairs will generally be viewed more favourably when it comes to the spreads that you get.

If the broker uses fixed spreads then the amount of the spread will be lower for the commonly traded currency pairs.  This means that the commonly traded currency pair might have a spread of 4 pips and the exotic currency pair will have a spread of 7 pips.  Of course, all currency pairs will have a different spread and you need to consider this.

When the broker uses the variable spread scheme the commonly traded currency pairs will generally have tighter spread overall.  The spreads are also more likely to change when you are trading a commonly traded currency pair.



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