Fixed Spreads versus Variable Spreads

When you are looking for a Forex broker you will see that a couple of different types of spreads available. One will be the standard “fixed” spread which means that the spread will remain the same no matter what. The other is a “variable” spread which is determined by the marketplace. This can rise or fall depending on what the best bid and offer prices are at the time.


With a fixed spread a Broker guarantees that the spread will always be the same. This helps you to plan your trading costs more effectively as you already know how much the bid and offer prices will differ when you place a trade. The spreads will be the same even when news announcements are happening which are a time of extreme volatility. The Broker might promise a 3 pip spread on the EUR/JPY as an example. This can be useful when you are trading the shorter time frames as the amount you have to overcome in spreads is constant. This allows you to know ahead of time that you need at least 4 pips gained to make a profit against the above example as you trade.


Variable Spreads


A variable spread simply will pass long the best bid and offer prices that the Broker can find for you at any given moment. In times of high liquidity the spread on these Brokers tends to be lower. This makes trading cheaper on the whole but also comes with the risk of market conditions at times. E.g. during Asian trading the above mentioned EUR/JPY pair might be lower than the 3 pips perhaps something like 1.8 pips. This makes cheaper trading costs which is always a plus. However during a market announcement the spread might widen as the amount of orders shrink in the marketplace. E.g. during the Non-Farm Payroll announcement this pair could very easily have a 20 pip spread. Because of that variable spread Brokers are extremely difficult to trade during times of important news announcements.


The difference between the two will not matter as much to long-term traders though. Because of that a higher timeframe trader will place less trades so a handful of pips lost of gained due to trading costs will be miniscule in the big picture as far as trading results. The spread difference is simply a concern of the shorter-term trader that is not aiming for hundreds of pips on every trade. Because of this some traders will hardly notice the difference. However if you are trying to scalp the markets it can make all the difference in the world.