Fixed vs Variable Spreads

Fixed Spreads vs. Variable Spreads

When looking for a prospective broker, it is important to research how they price their spreads. Over time, the spreads that a trader pays ends up costing a significant amount, and should be a key consideration when choosing a Forex broker.

Forex brokers generally offer two types of trade spreads, variable or fixed. So, which is the better option? Opinions differ amongst traders and it does depend on individual trading styles. First, let’s look at the difference between the two spread structures.

With variable spreads, the difference between the buy and sell price of a particular currency pair fluctuates in a range. A variable spread for the EUR/USD pair generally differs between 1 to 4 pips for most brokers, but during volatile market conditions can actually widen to as much as 8 or even 10 pips. A variable spread widens in correlation with increased liquidity in the market and is really only low during times of market inactivity.

On the other hand, fixed spreads are predetermined and remain constant throughout all trading conditions. A fixed spread will usually fall within the range of a variable spread, and is commonly set at either 2 or 3 pips for EUR/USD. Though traders essentially pay a small premium during quiet market hours, when a variable spread may be lower, the broker ensures that the spread will not widen during even the most volatile market conditions. Fixed spreads allow traders to better strategize without factoring in an unpredictable variable that inflates transaction costs during times most critical to traders.

 

Quiet versus Volatile Markets, What Kind of Trader are You?

Variable spreads may be more suited to long-term traders who do not trade during news events and are prone to entering and exiting during quiet market conditions. This way they can more consistently obtain a price that is in the lower range of the variable spread. For example, if a trader were to enter the market during off-peak times with a variable spread of 1 or 1.5 pips on EUR/USD as opposed to the fixed 2 or 3 pip spread on many platforms, he would save money on the spread in the long run.

  • 100 trades at 1 pip (or 1.5 pips) = $100 ($150) in spreads
  • 100 trades at 2 pips (or 3 pips) = $200 ($300) in spreads

However, flat markets and off-peak times are periods of consolidation when it is less clear where the price will head next. Most traders prefer to place positions when a clearer direction is evident in the market.

During the swift market activity, especially around important fundamental releases such as a speech by a central bank official or the opening of local business hours and stock exchanges, spreads are widened to the upper part of their ranges. Likewise, during breaks of key technical levels, the market may also be very volatile sometimes moving as much as 100 pips in as little as 5 minutes. During these vulnerable times, opening positions becomes more expensive, which can be a deterrent to trading.

Consider this example: A trader prefers to enter and exit the market more when it is reacting to key news and events. He opens 100 positions of EUR/USD; he places 20 trades at a spread of 1.5 pips, 20 at 2 pips, and 30 each at 5 and 8 pips when the spread has widened to the upper part of its range.

  • 20 trades at 1.5 pips = $30 in spreads
  • 20 trades at 2 pips = $40 in spreads
  • 30 trades at 5 pips = $150 in spreads
  • 30 trades at 8 pips = $240 in spreads
  • 100 trades at Avg. (4.6 pips) = $460
  • Altogether the 100 trades cost $460.
  • 100 trades at fixed 2 pips = $200 in spreads.

With a fixed spread, those same trades would have amounted to a cost savings of $260. This is a very simple case, but highlights the point that it depends a lot on the kind of trader you are and if you prefer trading during busy fast moving markets or times when the market is calmer.

 

Variable Spreads and Stops

Variable spreads may even set off protective stops and limits unwittingly. If the difference between the Bid and Ask widens and reaches the level of a stop or limit, this large gap may suddenly execute a conditional order. This adds an extra variable to your strategy that you need to consider. This might be less likely to occur with fixed spreads because the Bid and Ask are always synchronized. Fixed spreads minimize the element of surprise; traders know exactly what the parameters are at all times, allowing for better strategic planning and money management.

 

The Verdict

Tight, competitive spreads affect your bottom line as a trader, and the best spread structure for you depends on your trading style, the appetite for risk, ability to react in a fast-moving market, and ultimately, the quality of execution. Fixed spreads are consistent and predictable regardless of market liquidity. On the other hand, variable spreads tend to provide lower costs only during quiet market conditions—times of limited market activity when traders may have less incentive to trade. CMS Forex offers one of the lowest fixed spreads in the industry; EUR/USD and USD/JPY are offered with a spread of just 2 pips. Coupled with the commitment to offering quality execution, CMS Forex remains a truly competitive player in the Forex arena. Perhaps you are interested in trading during a stagnant market or simply prefer the most popular brand name. The choice is yours.

 

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EUR/USD Forecast: the Fed will likely hike, but that does not longer mean dollar’s strength

EUR/USD seen below 1.1000: but with higher targets long term, as bearish pressure decreases, on data imbalance.

GBP/USD interim top at 1.3000 pretty much confirmed: as bears lead the way from now on.

USD/JPY yen weakness will prevail: despite decreasing buying interest around the USD, the pair is still seen advancing, but not far beyond 115.00.

AUD/USD nearing a bottom, bullish in the longer run: Aussie’s latest decline seems to have found a floor near 0.7300, with the pair hardly seen below the level in the next three months.

EUR/JPY bears outpace bulls, back below 120.00: big banks are still beating for a decline, against trader’s view of fresh 2017 highs.

EUR/USD Forecast: lower lows for the year around the corner

The EUR/USD pair fell down to 1.0699 this Wednesday, bouncing modestly afterwards, but maintaining the soft tone in the London morning. Stocks continue consolidating as the Trump euphoria receded, with European index trading modestly lower, but not far from their opening levels. The USD 10Year yield is above 2.20%, after a brief decline, underpinning the greenback.
There are no macroeconomic news in the EU scheduled for this Wednesday, but the US will release its October PPI figures, and its latest industrial production data, generally expected to have improved from the previous month.Read more

 

 

 

GOLD 06.07

The price above 200 MA, indicating a growing trend.
The MACD histogram is above the zero line.
The oscillator Force Index is above the zero line.

If the level of resistance is broken, you should follow recommendations below:
•             Timeframe: H4
•             Recommendation: Long Position
•             Entry Level: Long Position 1376
•             Take Profit Level: 1389 (2300 pips)

If the price rebound from resistance level, you should follow recommendations below:
•             Timeframe: H4
•             Recommendation: Short Position
•             Entry Level: Short Position 1363
•             Take Profit Level: 1355 (800 pips)gold 0607

Gold Fundamental Analysis June 2nd 2016

Here are the key factors to keep in mind today for Gold trades:

  • Australian Trade Balance: The Australian Trade Balance for April was reported at -A$1,579M. Economists predicted -A$2,100M. Forex traders can compare this to the Australian Trade Balance for March which was reported at -A$1,971M.
  • Australian Retail Sales: Australian Retail Sales for April increased by 0.2% monthly. Economists predicted an increase of 0.3% monthly. Forex traders can compare this to Australian Retail Sales for March which increased by 0.4% monthly.
  • British Markit/CIPS Construction PMI: The British Markit/CIPS Construction PMI for May is predicted at 52.0. Forex traders can compare this to the British Markit/CIPS Construction PMI for April which was reported at 52.0.
  • Eurozone PPI: The Eurozone PPI for April is predicted to increase by 0.1% monthly and to decrease by 4.1% annualized. Forex traders can compare this to the Eurozone PPI for March which increased by 0.3% monthly and decreased by 4.3% annualized.
  • ECB Rate Decision: The ECB is predicted to to announce its Interest Rate at 0.00%, its Deposit Facility Rate at -0.40% and its Marginal Lending Facility Rate at 0.25%; this would equal no change in the ECB rate policy from the previous meeting. The Asset Purchase Target is predicted at €80B, also unchanged from the previous meeting.
  • US ADP Employment Change: The US ADP Employment Change for May is expected at 175K. Forex traders can compare this to the US ADP Employment Change for April which was reported at 156K.
  • US Initial Jobless Claims and Continuing Claims: US Initial Jobless Claims for the week of May 28th are expected at 270K and US Continuing Claims for the week of May 21st are expected at 2,152K. Forex traders can compare this to US Initial Jobless Claims for the week of May 21st which were reported at 268K and US Continuing Claims for the week of May 14th which were reported at 2,163K.

Should price action for Gold remain inside the or breakout above the 1,205.80 to 1,220.20 zone the following trade set-up is recommended:

  • Timeframe: D1
  • Recommendation: Long Position
  • Entry Level: Long Position @ 1,215.00
  • Take Profit Zone: 1,289.00 – 1,301.00
  • Stop Loss Level: 1,197.00

Should price action for Gold breakdown below 1,205.80 the following trade set-up is recommended:

  • Timeframe: D1
  • Recommendation: Short Position
  • Entry Level: Short Position @ 1,203.00
  • Take Profit Zone: 1,190.00 – 1,197.00
  • Stop Loss Level: 1,210.00gold_11-636x338