In foreign exchange investment, spread is a concept that novice investors must understand before getting started. What is the spread? As the name suggests: Spread is the difference between buying and selling, which is also the main source of profit for foreign exchange trading platforms.

Recently, many foreign exchange margin investors have responded to us that the spreads of some trading platforms with floating spreads have expanded and fluctuates frequently. Even some well-known fixed-spread platforms have suddenly expanded their spreads. GBP/USD once expanded to 15 to 20 points. In the current market conditions, floating spreads basically reflect the true price of the market, while fixed-spread platforms may Faced with relatively large risks, investors should not blindly pursue low or fixed spreads and ignore the business risks that brokers take for this purpose.
What are foreign exchange floating spreads and fixed spreads

What is the foreign exchange floating spread

Floating spreads, that is, spreads change with changes in market conditions. As for the upper and lower limits of the changes, the regulations of each foreign exchange platform are different, so it is impossible to give examples. Nowadays, most foreign exchange trading platforms adopt floating spreads, because floating spreads are more market-oriented. Quoting with market fluctuations is a relatively fair quotation method for investors and foreign exchange trading platforms.

What is a foreign exchange fixed spread

Fixed spreads, that is, no matter how much the currency quotes for buying and selling fluctuate, they will be calculated according to the pre-defined spreads. For example: the euro/dollar interest rate moved from 1.1130 to 1.1131, which is a basic point. At this time, the foreign exchange trading platform will quote the currency for the last point, which is the fixed spread.

Its advantages have a certain protective effect for novice investors or Huiyou with less capital. Because once the market fluctuates greatly, investors do not have to worry about increasing their transaction costs due to the fluctuation of spreads, and bear less foreign exchange risk. The disadvantage is that the fixed spread is due to the fixed transaction cost. When the spread is widened, it will cause a loss in the cost of the foreign exchange trading platform, and it is very likely that traders cannot place orders.

What is the difference between floating and fixed spreads?
What is the difference between floating and fixed spreads?

Floating spread: It means that the fees charged by traders are changed according to market fluctuations.

Taking the euro as an example, when the overall market trading is relatively flat, the euro’s spread is lower. Under normal circumstances, the euro spread fluctuates between 2-4 points. When the market ushered in a heavy market, the euro spread may fluctuate to 4-6 points. On some platforms, the euro spread is normally around 3 points; the spreads such as the pound and yen fluctuate around 2-5, with an average of 4 points; the gold spreads fluctuate around 2-6, with an average of 5 points. If you want to reduce your transaction costs, you can choose to trade when the spread is relatively low. When the market is relatively flat, it is also beneficial to your operation.

Fixed spreads: It means that regardless of whether the market is flat or volatile, the spreads will not be affected. Some foreign exchange platforms have fixed spreads of 3 pips for the euro and 4 pips for the yen and pound. The fixed spread is higher than the floating spread.

How are foreign exchange floating spreads calculated?

Forex floating spreads, as the name implies, are floating spreads, which are constantly changing with market changes, so they cannot be accurately calculated. Traders only need to know an approximate floating range. Some use floating spreads. Foreign exchange products usually fluctuate around 2 to 3 points, while gold products generally fluctuate around 4 to 5 points.

Which is better to choose between floating and fixed spreads?

Under the condition of a fixed spread, the broker guarantees that the spread remains fixed. This helps traders calculate their transaction costs more efficiently, because they already know exactly the price of the transaction before the transaction. Even in the extreme market where major news events occur, the spread can remain unchanged, which is its biggest advantage. This can ensure that your stop-loss and take-profit are executed at a precise position, and there will be no gaps or unfinished transactions. Another advantage of fixed spreads is that it is easy to calculate profitable points when you make short-term trades. For example, the spread of USD/JPY is 3 points, so you know very clearly that you have to earn at least 4 points for this trade. Be profitable.
Which is better to choose between floating point difference and fixed point difference?

Floating spreads change as the market environment changes, which means that the broker can give you any quotation at any time. When the market is active and liquidity is sufficient, the spreads are generally relatively small. For example, when trading USD/JPY during the Asian session, the floating spread may only require 1.8 or even less points, instead of 2 to 3 points like a fixed spread. However, during periods of inactive market transactions or major news releases, floating spreads may change drastically. For example, when the US non-agricultural data is released, the fixed spread can remain unchanged, while the floating spread may expand to more than 10 points! Therefore, it is generally not recommended to trade in news events.