This article looks at the spreads that forex brokers offer you.
When you trade on the forex market you will notice that forex brokers do not charge commission like broker on other financial markets do. This is due to the spreads that they charge instead. It is important that you know what a spread is and how it can be charged. There are three different schemes that forex brokers can use to charge the spread and you have to know about them. When you know about the spreads you will be able to determine which spreads are best for your trading.
What are Spreads?
The first point that you have to consider is what a spread is. When you trade forex you will be offered a quote that has two prices on it. These prices are the ask and the bid prices which are what the broker will buy and sell the currency pair for. The spread is the difference between these two prices. The spread can range in size from 1.5 pips to 7 pips.
The spread that you get can be determined by a number of different factors. These factors will include the scheme that is being use, the market conditions and the currency pair that you are looking at. The most common currency pairs will have tighter spreads than the exotic currency pairs.
The Schemes Forex Brokers Use
When you are looking at spreads you have to consider the scheme that the broker is using. There are three ways that spreads can be charged, but only two ways are commonly used by retail brokers. The scheme that is not often used by retail brokers is the percentage spread. When a brokers uses this spread they are going to be getting very small spreads on the trades. The only way that this spread scheme is profitable is when there are high volume trades. These trades are not completed by retail traders and this is why it is not used by retail brokers.
The first scheme that is used by retail brokers is the variable spreads. This spread scheme is much more common than the other type. With these spreads the amount you are charged will change depending on the condition of the market. Generally when the market is liquid and doing well the spreads will tighten. When the market is doing badly then the spreads will widen. This is often linked to the costs that the broker has to pay to complete the trades.
The other spread option that you can get is the fixed spread. When forex brokers use this method they are going to offer you the same spread amount all year. This means that you are getting a single spread amount when the market is liquid and when it is not.
Choosing the Right Spread
When you look at the forex brokers that you can use you should consider what spreads you are going to get. The different spreads will affect different trading strategies in different ways. There are some strategies that need to have tight spreads and other strategies that can absorb the wider spreads. You have to consider which strategy you are going to trade with.