Basics of Forex spreads
If you’re trading the currency market, spreads refer to the price difference between the currencies you are buying and selling – the BID and the ASK price.
Using the MT4 trading platform, you can clearly see the Bid and Ask price for each FX pair and other instruments available to trade. This means you can easily work out the spreads for the currency pair or cryptocurrency you want to trade.
The thing to remember is the wider the spread, the more the price has to move in your favour for you to make a profit on a forex trade.
Different forex providers offer different levels of spreads.
What factors affect FX spreads?
There is no doubt the forex market is one of the most dynamic and most liquid markets in the world. And like any other markets, price movements in FX pairs are influenced by supply and demand. This means if there are more buyers for a particular currency, demand for it can go up and this may affect the spreads.
Here are some of the key factors that affect FX spreads:
Liquidity – As you already know, liquidity is critical in the forex market. As a forex trader, you want to be trading the more liquid currencies like the majors and the crosses. This is because these currencies tend to be in more demand and actively traded than other currencies, like the emerging market currencies for example. The more liquid a currency or an FX pair, the lower the spreads on the trade.
The number of liquidity providers used by FX brokers is also a vital factor that affects spreads. As an ECN broker, Smart Markets FX gives you access to at least 20 major banks and ECN forex liquidity providers. And that is an important and re-assuring fact to know because it means you have access to the liquidity and some of the best spreads available in the markets.
Trade size – Depending on the size of your trades, a forex broker may be able to offer you a tailored spread. Usually, the bigger the size of the trade, the better the spreads.
Market conditions – Spreads can fluctuate depending on different market conditions. For example, when there are major economic announcements or high-impact news that can affect currency movements as well as trader sentiments, spreads can change.
As a currency trader, you need to be aware of the various forex market news that may impact your trades. It is a good idea to have your risk management strategy in place including the use of stop loss and guaranteed stop orders particularly in fast moving markets.
It is also in your best interest to regularly check the forex economic calendar to stay on top of events that may affect the forex market. Some of the key events that usually affect forex market movements are central banks’ decisions, employment or jobs data, GDP and inflation (CPI) announcements.
Forex market hours – While the global foreign exchange market operates 24-hours 5-days a week, some trading sessions (hours) are more active than others. Keep in mind that when there are not a lot of trading activity in a certain period, spreads can fluctuate before they revert to their normal level when the trading activity picks up again.
For example, the start of the FX market trading week may see less activity and therefore wider spreads compared to when the markets are in full swing in the middle of the week. So, be mindful of the trading hours and sessions you are trading as they can affect the spreads on your FX trades.
Types of Forex spreads
Now that you know the important role of spreads in your FX trading, you need to be aware of the different types of spreads being offered by your FX broker.
There are two major types of Forex spreads:
Fixed spreads – This means the difference between the Ask and Bid price are constant and not affected by different market conditions. Fixed spreads may be ideal if you don’t want to be affected when there is an extreme level of volatility in the FX markets. This is because too much volatility can sometimes cause spreads to widen.
Variable spreads – Most Forex brokers offer variable spreads as these are more reflective of what is happening in the markets. This means you can take advantage of price movements and tighter spreads particularly when there is a lot of liquidity in the markets.
At Smart Markets, variable spreads can help ensure you get the best forex spreads depending on market conditions.
Open an Account and take advantage of Smart Markets FX’s ECN forex liquidity and access the best forex spreads in the markets.