Variable spreads and why they matter

Forex brokers nowadays offer a lot better choice of trading conditions for their customers. When it comes to spreads, brokers usually offer either fixed spreads or variable spreads. Fixed spreads are known to be the key giveaway for market markers, or brokers that operate a dealing desk or acting as a counter party and thus not widely preferred.

Most ECN/STP or non dealing desk execution brokers however are known for their variable spreads. While this second option makes for a preferred choice for the more serious traders, it does come with its own disadvantages, which if the trader does not pay much attention to, could prove to be a very expensive mistake they would make.

How variable spreads work?

In order to understand if are getting a fair deal, it is important to understand how variable spreads work.

An ECN/STP forex broker often aggregates the bid and offer prices from their liquidity providers, also known as counter parties. After collating all the bids and offers, the forex broker then picks out the best bid and offer price and provides them to their traders. It so happens that during general trading hours such as the London/European trading session and especially during overlap periods such as the Tokyo/London or London/US sessions, the spreads can get extremely low, as much as 0.01 pip. While this ensures that your orders are filled at market price and as close as possible, the main issue with variable spreads comes during off peak hours such as early Asian trading session or late US trading session.

Generally during times like these, the spread tends to widen. When the spreads widen considerably, it could mean missing out on your take profit level, or even failing to pick up your buy or sell orders due to the large difference in spreads.

For the intraday trader who trades during a trading session, this might not pose a big problem, but for swing traders who prefer to keep their positions open overnight, the large variations in spreads especially during off peak hours can mean the difference between a winning and a losing trade.

Based on the above fact, it is therefore important for traders to pay attention to the spreads their forex broker charges them. Although most forex brokers nowadays tend to advertise only the spreads during peak trading hours (where, understandably, the spreads can get very low and thus competitive), it is essential to pay attention to spreads during off peak hours as well.

While it might seem a bit complicated for traders to sift through the many forex brokers, one broker of repute that comes to mind is ThinkForex. Regulated by ASIC and having been an established broker for the past couple of years, ThinkForex offers one of the best trading conditions in the markets. While boasting of spreads as low as 0.01 pips during peak hours, the spreads offered by ThinkForex during off peak hours are also considerably better than most forex brokers. More recently, the broker (ThinkForex) announced reduced spreads on precious metals as well, with Gold spreads as low as just $0.10 (10 cents), thus ensuring that the competitive spreads offered is valid not just for currency pairs but precious metals as well.

About the author: Editorial Team

ForexPromos Editorial Team is comprised of a selection of hand picked editors that bring you the latest breaking news from the financial markets. We also provide forex educative articles as well as comprehensive fx broker reviews.

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