When you look at different forex brokers you have to consider the spread scheme they are using. There are three spread schemes that you should know about. It is important that you know how these spreads are charged and whether or not you are likely to get these spreads. Certain spread schemes are more common with retail forex brokers than others.
What Are Spreads?
It is important that you know what a spread is before you start looking at how brokers charge them. When you trade forex you are presented with two different prices, the sell and buy prices. These prices will never be the same amount and the difference is the spread. You can easily calculate what the spread for a currency pair is by subtracting the one price from the other.
Forex Brokers and Spread Percentages
One of the ways that forex brokers can charge their spread is through a spread percentage. This is not a method that retail traders will usually come across because large volumes must be traded for brokers to make a profit. When this method is used the broker charges an extremely low commission that is only part of a pip. Brokers only make decent money with this spread method when large numbers of lots are being traded. This method is generally used by institutional brokers who deal with the large volume trades of corporations and hedge funds.
The Variable Spreads
The most common method of charging a spread is through the variable spread method. This method will have varying spreads which are related to the conditions on the forex market. If there is high liquidity on the market then the spreads generally tighten. However, if a news release has caused a change in the market the spreads may widen for the broker to make the highest profit. Variable spreads are offered by most retail traders and there is no way of determining what the spreads will be at any time.
The Fixed Spreads
One of the ways that retail brokers charge their spreads is through fixed spreads. These spreads are a set amount that does not change regardless of what the market is doing. If there is high volatility the spread will remain the same. The spreads will differ for the various currency pairs with the most commonly traded having higher spreads. The spreads range from 1.5 pips to 5 pips, but there are some brokers that may charge more than this. It is important that you find out what the spread is before you open an account.
The Effect Spreads Have on Trading
The spreads you are getting can affect the way that you trade and the profit you will make. If you are using a short-term trading strategy then you possibly need tighter spreads. You should look at foxed spreads because they offer consistency allowing you to use your trading strategy at any time. There are some brokers that allow you to trade within the spread, but this is an advanced trading strategy. It is also very hard to find brokers that will allow you to do this.
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