Fixed or variable spreads

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SpiderX
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Fixed or variable spreads

Post by SpiderX »

Hi

Would like to ask a newbie question.
Is it better to go for a forex account with fixed spreads or variable spreads ?
Can someone help weight the pros and cons ?
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Jeuro
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Re: Fixed or variable spreads

Post by Jeuro »

.
The answer is not easy as black and white because involve many factors.

Here a few things to have in mind that may help your decision.

In the forex market the spreads are "always" variable.
So, when a Broker offer fixed spread, is market making your orders.

In the Interbank pricing, or ECN there are hundred of quotes of bid and ask prices at any millisecond.

Due to competition, arbitrage, etc. The ask and bids tend to be the same 90% of the time... so basically that means no spread between them. So, when a broker offers X amount of "fixed" spread.. say 2 pips. they quote at least 2 pips over the Interbank prices.. you place an order, they buy the money from the Interbank and sell it to you... they make a profit slightly under 2 pips.

But sometimes the prices in the Interbank has huge spreads.. for example during news release.
In those cases.. if you place an order, the Broker may have to pay a lot higher price then sold it to you.. so, they lose money. But they calculate that making a good profits of pips 90% of the time they can afford losing a few times.

Now, variable spreads are offered by Brokers 2 ways.. a) A fixed mark-up from the Interbank prices..
For example 1 pip... means whatever the price is in the Interbank (variable) they quote to you 1 pips over. b) They offer/quote the Interbank Price (variable) whatever that is + a commission.

If you are planning to do big volumes... b is the best option. But that only apply if your orders are bigger then 10 000 units.. because I do not know any Participant in the Interbank that takes orders for less then that.

J.
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JoaoF
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Re: Fixed or variable spreads

Post by JoaoF »

Good advice, Jeuro. I might add that a lot of brokers that offer "fixed" spreads do not want to lose money, even occasionally. As Jeuro said, there is not a simple answer.

What is supposed to happen with mini and micro accounts is that a large number of mini/micro orders are "aggregated" into a larger order which the broker can offset with his liquidity providers, large banks usually.

Of course, it's unlikely that this will always be possible, and often the broker will take the other side of your trade. Brokers are no more fond of losing money than traders, so they have a lot of ways of recovering their loses and enhancing their profits.

Some will hunt your stops, slow execution when the price is moving against you, and/or close trades when you are winning. Those are just a few of their tricks.

I suspect that almost all micro accounts trade against the broker at least part of the time, if not all of the time. You may not lose right away, and, in fact, you may be treated especially fairly for a while because the broker is trying to encourage you to commit more money to the account.

But eventually, the broker will try to recover any loses he has had, naturally. He doesn't expect to go broke trading against you.

The broker probably thinks his "loses" are quite safe when your account is small, since you are not likely to withdraw your profits on a very small account. As you trade more, trying to build up your account, he can always recover his loses over time with some of the tricks mentioned above, hopefully without you noticing too much.

However, if you win a lot and try to close your account, you may encounter a lot of resistance, stalling, lost documents, requests for more documentation, slow or no answers to your inquiries, no record of your withdrawal request, etc.

Short version, if you receive the huge advantage of "fixed" spreads, do not expect the broker to play fair with you if it costs him money. And it will during news releases!

One of the largest brokers, FXCM, a publicly traded corporation, was fined by the NFA for taking all the positive slippage from traders, but applying all the negative slippage to their accounts. So, traders basically got only negative slippage.

Supposedly, they've cleaned up their act, not wanting another fine. But we'll see.

Variable spreads can more nearly reflect the true spreads in the interbank market, IF the broker is relatively honest. That's a big if that requires doing a lot of due diligence.

If you can find an ECN with an honest broker, expect to pay a decent commission and to have very wide spreads during important news releases like the NFP, or, for example, when the Chairman of a Central Bank speaks.

Managing these widening spreads is something of an art in itself, and traders have various ways of trying to do it, such as entering before the release, sometimes in both directions with a stop loss. There are many others.

Some work at least some of the time, but I suspect that the low hanging fruit of news trading from a few years ago is long gone! Good luck! Hope this helps a bit.
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Mahapathy
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Re: Fixed or variable spreads

Post by Mahapathy »

JoaoF wrote: Some work at least some of the time, but I suspect that the low hanging fruit of news trading from a few years ago is long gone! Good luck! Hope this helps a bit.
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Kurdi

Fixed or variable spreads

Post by Kurdi »

which spreads is more appropriate it completely depends on your trading strategies , if love doing scalping should choose the broker which has most narrowest trading spreads.
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SteveHopwood
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Fixed or variable spreads

Post by SteveHopwood »

Kurdi » Tue Apr 28, 2020 7:32 pm wrote:which spreads is more appropriate it completely depends on your trading strategies , if love doing scalping should choose the broker which has most narrowest trading spreads.
You clearly understand nothing and have taken no notice of anything I have told you. You are a moron. You now belong to that august group of individuals unable to do anything other than read posts and download stuff.
Read the effing manual, ok?

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