Understanding how variable spreads work is essential when trading online. Search, compare and choose from our list of the best online brokers with floating or variable spreads.
Brokers with Variable Spreads
What are variable spreads?
Spreads are basically the difference between the bid price and the ask price. It is a basic concept in financial operations and can be fixed spreads or variable spreads (also called floating spreads).
Of course, if you open an account with an online broker that offers fixed spreads, you will already know the difference (2 pips, 3 pips – a pip being the smallest price movement that the pair you are trading can make).
However, when spreads are variable, you can have some idea of what their magnitude will be (you only have to look at the market situation at the time), but there is no certainty. This adds much more uncertainty to the trade, because any unexpected event will cause spreads (always at the mercy of market volatility) to swing up or down.
Therefore, the general advice that is always given is that, if you opt for variable spreads, it is much better to enter the market when there is no news that could shake the market excessively. It is better to wait until the market is calm, because when the market is calm, variable spreads are usually lower than fixed spreads.
Which online brokers offer variable spreads?
Although an increasing number of Market Maker brokers are offering variable spreads, this is not the norm. It is still much more common for variable spread brokers to be ECN, STP or DMA brokers, i.e. Forex brokers that play the market (not their dealing desk), do not act as counterparties and simply transfer orders.
Brokers with variable spreads usually give minimum and maximum amounts and use the average spread to convince the trader. They use the ambiguous and misleading term «from» X pips. Be very careful with this «from», because you know that variable spreads depend on the market.
Another aspect to bear in mind is that these brokers, in addition to the spread, usually charge a commission per lot traded.
Why is it interesting to choose Forex brokers that offer variable spreads?
Notwithstanding the above – especially that last point about commissions – in normal market conditions it is often more interesting and attractive to use floating spreads, why, what are the advantages of floating spreads?
- Online brokers with variable spreads have direct access to the market, so there is no conflict of interest with them.
- Variable spreads are generally lower than fixed spreads, especially when the market is calm.
- They allow any type of operation: scalping, hedging…
But these three advantages should not be enough for you to make a decision. Take a few minutes to analyse the market, think about what type of operation you are going to consider and choose what best suits your needs and characteristics.
To summarise, it is possible to generalise (although it is rarely good to do so) by saying that fixed spreads are suitable for beginner traders, as they will know the cost of the trade in advance. Variable spreads, on the other hand, are better suited to professionals using more advanced strategies such as scalping or hedging.
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