Basic Forex Knowledge: Understanding Fixed and Floating Spreads

Whether you are an experienced broker or only starting out in the market, you need to understand how different types of spread work. They affect the offers that you make to your clients and how you manage your business. So, today we are going to describe each type in a bit more detail.

A spread is the difference between Bid and Ask prices. It is calculated in pips, and its size directly affects a trader’s profitability.

FIXED SPREAD

A fixed spread remains unchanged regardless of price fluctuations although it may be adjusted during high volatility periods. Fixed spreads are lower risk, as they make the entire trading process more predictable for traders who can calculate how much they need to make a profit.

FLOATING SPREAD

Floating spreads fluctuate and typically follow market trends. They are also typically lower than fixed spreads outside of high volatility periods. The floating spread represents a higher risk for traders as it can increase dramatically, making the final execution price much higher than expected.

HOW SPREADS CAN AFFECT TRADING BEHAVIOUR

While floating spreads may be beneficial during quieter market times, fixed spreads are ideal for volatile market conditions.

Traders might use both spread types for different strategies, but it is generally believed that fixed spreads are more suitable for medium to long-term trading. Floating spreads, in turn, are more common in day trading and are often used for scalping.

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