Fixed Spreads vs. Floating Spreads
Forex brokers offer a choice of fixed and floating spreads. So, what's best? The answer to this question depends on your experience and trading strategies.
If your broker quotes fixed spreads, the bid-ask spread will be constant at all times, regardless of market conditions. You'll find that spreads may vary across currency pairs: they can be as low as 2 to 3 pips for Major currency pairs and wider for exotic currency pairs.
If your broker quotes floating spreads, the bid-ask spread will change with market conditions. For example, the typical EUR/USD spread may vary between 1 and 4 pips under normal market conditions. However, it can widen to 8 pips and beyond under volatile market conditions.
Fixed or floating spreads?
The answer to this question depends on your experience and trading style.
Because floating spreads tend to be lower than fixed spreads during normal market conditions, they can be more cost effective if you are a medium to long term investor, tend to keep your positions open overnight or trade during quiet market conditions. AvaTrade, and HF Markets quote particularly competitive spreads across most Majors.
However, fixed spreads will work for you if you are new to Forex trading, as they provide a more predictable trading environment: you know exactly how many pips you need to make to net a profit on your trade. You might also prefer a fixed spread trading environment if you're a day trader, engage in algorithmic trading or want to trade around news events.
If you're looking for low fixed spreads, read our guide to Forex brokers with fixed spreads.
What drives Forex market volatility?
- News events and data releases will move the markets. This is particularly case when private information which may not have already been factored into market prices is released into the public domain. Likewise, breaks of significant technical levels can also bring about price jumps even in the more liquid EUR/USD.
- Swings in supply and demand also move the markets. This is particularly the case when trading sessions across the Asian, European and American financial centres overlap. Liquidity is deepest and prices more likely to move at those times at those times of the day. Check our guide to Forex trading hours for more information.
- Volatility is greatest for less liquid cross currency pairs. Changes in supply and demand as well as news releases tend to have a greater impact across exotic currencies.