This seems to be an inexhaustible argument amongst brokers and traders – fixed or variable/floating spreads. When choosing a broker, a significant consideration should be trading conditions – which includes the type of spreads. The cost of spreads can add up, cutting into your bottom line, so let’s take a look at which is better: fixed spreads or variable.
Fixed and Variable Spreads Explanation
Fixed spreads as the name indicates stay static – variable spreads using widen at the time of major events or significant news releases. The first benefit of fixed spreads I think is immediately obvious, it allows you to trade significant events, without higher broker fees as a result of widening spreads. A secondary benefit is the ability to consistently calculate your exposure to the market, something that would be very challenging as the widening of spreads is usually at the discretion of the broker.
Fixed spreads generally hover in the 2-3 pips area. Although these spreads can be slightly wider than variable spreads (some may go as low as 0 pips) – but could surpass 10 pips during volatility.
Variable vs. Fixed Spreads and Your Bottom Line
Slippage can be very difficult to calculate when trading. Depending on your strategy not knowing how many pips are the brokers could also be damaging. A great example are so-called scalpers, which make multiple short trades throughout the day taking small profits off the top (thus the strategy name). In completely ideal circumstance, knowing exactly how much the spread will cost you, can help you know when to exit a position. Even if you don’t keep a position open to cover you broker’s costs – you will at least be able to calculate it with fixed spreads.
Fixed spreads are unbelievably valuable for traders that use EAs or other automated trading tools. Why is it extremely valuable you ask? Well, consider this scenario – you have your EAs running on a VPS your stop loss and take profit are set within the parameters of your risk appetite. Suddenly a global event (such as the French elections) happen, causing the euro to plummet. Your EA does its job and exits the trade, but the resulting volatility has caused your variable spread broker to increase their spreads. This causes you to lose more pips than you would’ve if you kept the position open and exited at a lower price but during a more stable time for the market – at a tighter spread.
Here is another example, the chart above displays multiple brokers spreads during the announcement of the NFP October. The lowest spread amongst the variable spread brokers was 4.1 pips. The top three accounts offered by easyMarkets though, not only feature lower spreads by 1.1 pip compared to the other variable spread brokers but they are also fixed.