You can Trade forex with just $100! Knowing forex spread helps you a lot

The type of spread that a forex broker provide depends on how it makes money

There are two types of spread in forex: Fixed and variable(also known as “floating”)

Fixed spread means all deals are controlled by brokers, this is also called “dealing desk model”. The brokers buy large positions from their liquidity providers and offers these positions in smaller sizes to traders. In fixed spread, the brokers act as the counter-party to their clients trader, using “dealing desk model”, the forex broker can offer fixed spreads because they can control the prices they offer their clients.

The advantages and disadvantages of trading with fixed spread.

Fixed spread can work with small capital from traders, this is good for the traders who do not have a lot of money to start trading with. Fixed spread can also be predicted as a part of your transaction costs, because the spreads never change, you will know how much you can expect to pay when you start trading.

On the contrary, sometimes the forex market is volatile and the prices are rapidly changing, requotes can occur frequently when trading with fixed spread, and the price only comes from your broker. Since spreads are fixed, the broker wont be able to widen the spread to adjust for current market conditions. When you try to enter a trade at a specific price, the broker will “block” the trade and ask you to accept a new price. You will be “re-quoted” with a new price. Because the prices are always lower then the price you ordered.

Slippage is another problem. Because spreads depend on brokers, when prices are moving too fast it will be too hard to maintain a fixed spread. Therefore, the final trading price is totally different from the entry price.

What is variable spread in forex？

As the name suggests, variable spreads are always changing. Variable spreads are offered by non-dealing desk brokers. Non-dealing desk brokers get their pricing of currency pairs from multiple liquidity providers and pass on these prices to the trader without the intervention of a dealing desk. This means they have no control over the spreads. And spreads will widen or tighten based on the supply and demand of currencies and the overall market volatility.

For example:

you may want to buy EUR/USD with a spread of 2 pips, but just when youre about to click buy, the U.S. unemployment report is released and the spread rapidly widens to 20 pips!

The advantages and disadvantages of trading with variable spread.

Trading forex with variable spreads means more transparent pricing, especially when you consider that having access to prices from multiple liquidity providers usually means better pricing due to competition.

Variable spreads are just as bad for new traders. Spread may widen so much that what looks like a profitable position can turn into an unprofitable one within a blink of an eye.

Fixed spread and variable spread, which one is suitable for you？

It depends on what do you have.

If you have a small capital, you will benefit from fixed spread pricing.

If you with larger account and trade frequently during peak season, you will benefit from variable spreads. Or, if you want to trade fast and need to avoid being requoted, you can choose variable spreads.

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