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“The choice between fixed and variable spreads depends largely on your trading strategy and risk tolerance.”
When trading in the forex market, you will find that spreads make up a large part of your trading costs. Did you just ask yourself what spreads are? Ok, let’s rewind a little bit. The spread is the difference between the bid price (the price at which your broker is willing to buy a currency pair from you) and the ask price (the price at which your broker is willing to sell the currency pair to you). It essentially represents the cost of making a trade.
There are two primary types of spreads that forex brokers offer: fixed and variable (or floating) spreads. Each comes with its own set of advantages and disadvantages. In this article, we will cover the difference between them, and go through the pros and cons of each.
A fixed spread, as the name suggests, remains constant regardless of market conditions. The broker sets the spread at a specific value, and it does not fluctuate based on market volatility or liquidity. This type of spread is typically offered by brokers who operate as market makers. They create their own market for traders and often execute trades internally rather than passing them on to the external market.
Variable spreads, also known as floating spreads, fluctuate depending on the market conditions, such as volatility, liquidity, and overall demand. These spreads are typically lower during times of high liquidity (e.g., when major trading sessions overlap). Variable spreads are generally offered by brokers who provide direct market access, passing trades directly to the interbank market without intervention.
Let’s cut to the chase. The choice between fixed and variable spreads depends largely on your trading strategy and risk tolerance. If you prefer predictability and trade in a volatile market, fixed spreads may be suitable. However, you must also watch out for the possibility of requotes and slippages. On the other hand, if you are looking to minimise trading costs in stable markets, variable spreads would be the better option. They would also allow you to avoid requotes and slippages.
Are you wondering which spread type we offer? At XM, despite being a market maker broker, we offer our traders variable spreads. In this way, we eliminate the possibility of requotes and slippages, and keep our execution free from interruptions. Variable spreads also allow us to keep our rates competitive.
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