Understanding spread and commission fees is the most important step to take when choosing a broker. These are the difference between bid and ask prices of currency pairs and the cost of transactions for traders.
The cost of using a broker’s services is usually passed onto the trader (if it isn’t being paid for by the trading provider) by way of either a fixed spread, a variable spread or by a percentage of the spread.
Fixed Spread
Fixed spreads offer more transparency in trading costs for retail UTokers who immediately exit their positions. It’s because fixed spreads allow everyone to see an actual trading cost, while floating spreads can rise enormously as volatility increases.
It makes adjusting your budget and allocating money for trading, easier for the trader. In addition, it’s much simpler to plan your trading strategy and reduce risk factors such as requotes or slippage. For these reasons, many brokers offer this model.
Floating spreads fluctuate between ask and bid depending on the demand/supply equilibrium, total volume of trading etc, and can become more expensive with time but disciplined position sizing, stop loss/take profit orders can help mitigate this risk.
Variable Spread
If spreads are variable then they change according to market conditions and liquidity levels, such as low- and high-liquidity periods. Variable spreads offered by ECN brokers who go directly to Liquidity Providers (LPs) are usually lower than fixed spreads but they tend to widen when there are news events or during low-liquidity periods. The best way to recover from a change of spreads is to add stop-loss orders or take profit orders.
Regardless of which pricing model you select, you will also need to decide on the type of spread you prefer to deal with – be that a fixed spread or variable one. Each has its own advantages and disadvantages, and the type of spread you choose shall depend on the type of trader you are, based on your trading style, strategy and risk tolerance. Generally speaking, traders with smaller accounts who tend to stay out of their trades for shorter periods of time and mostly trade lower-risk set-ups will most probably opt for fixed-spread pricing; while traders who require faster trade execution whilst also not having their orders rejected due to ‘requotes’ would prefer variable-spread prices on their account. If in two minds on choosing which spread you are inclined to go with, spek to your broker for their advice and guidance.
High Spread
The difference between bid price and ask price is called a ‘spread’, and transacting costs can be expressed in ‘points’ or ‘pips’ (points of percentage in change). Margins, as forex traders call commissions, are basically an expense that greatly adds to trading costs. There are several tools and tricks that traders can use to minimise the impact.
High spreads occur when there’s high market volatility, or when key economic numbers are released.
The scale will vary depending on which trading pair is used; a spread of a major pair is generally limited to a smaller range than that of an exotic currency pair, which spreads much wider. Trading with a more optimal spread type helps a trader to manage his trading cost better; he can also use a smaller position size, coupled with a tool, which helps him to ‘monitor’ the spread and prevent from paying when a spread widens as a volatile environment exposes. This way, he can capture a potentially lower spread and gain a bigger profit.
Low Spread
Low spreads are imperative for traders; scalpers in particular, who place numerous trades over very short time frames in order to capture minor price movements, would have their trades eaten away by high spreads, negating any potential profit.
The trading industry has always cared about spreads because the tightness of spreads reflects how cheap or expensive it is to buy or sell, which of course increases profits on any successful trade. Spreads are also important for finding the true price of an instrument, because when the spread is tight, traders have a more accurate idea of where the market is at any given moment, and can make better decisions based on that.
Traders might also want to ensure that their broker is providing zero spread accounts, such as through ECN accounts that might appeal to high-frequency traders; or have broker fees based on commission on the spread (the currency market spread is the difference between the bid value of a currency and the ask value). Commission-based spreads can themselves be wider than other accounts (or brokers), but charge a flat fee per transaction (this can be great news for traders looking for higher-timeframe price movement opportunities, like scalpers, who want to catch a slice of a long trade in one swoop).
