Forex is the largest financial market in the world, with 13.9 million online traders working alongside banks and financial institutions across the globe. However, while the foreign exchange market presents a growing number of opportunities to traders, there is always a price you have to pay to enter the market. Spread Trading consists of Fixed Spreads and Floating Spreads, which represent the cost of individual financial transactions, with variable floating spreads at Avatrade offering a number of advantages to retail traders when compared to fixed cost transactions.

What are spreads?

A spread is the difference between the bid price and ask price of a financial asset or security. Every market has a spread, which is best understood as the price difference between buying or selling an asset. From a trader's perspective, the spread at any given moment represents the cost of each individual financial transaction. Spreads are one of the biggest costs involved with retail trading, with forex market participants always looking for the lowest possible spreads for each currency pair.

Along with defining individual transaction costs, the size of the spread can also be used to measure the liquidity of any given market. Given equal conditions, the profitability of each trading strategy is dependent on the spread and other trading costs. There are two types of spreads available to forex traders: fixed spreads, and floating spreads.

What are fixed spreads?

Fixed spreads are charged for each individual transaction, and remain constant regardless of underlying trading conditions. Market liquidity and financial news announcements do not normally influence fixed spread costs, which represent the fundamental difference between the price of purchase and the sale of the same financial instrument.

How to use fixed spreads safely

It's important to note, however, that fixed spreads may not be completely fixed at all times. A separate day rate and night rate are often used according to the individual broker, with an abnormal rate also possible during extremely volatile trading conditions. Fixed spreads are usually less competitive than floating spreads, meaning greater transaction costs and less profits.

What are floating spreads?

Floating spreads are determined in real time according to liquidity and underlying market conditions. Unlike fixed spreads, which may change just once or twice a day, floating spreads are continually updated and refined. Also known as variable spreads, floating spreads are dynamic and reflective of wider market conditions.

How to use floating spreads safely

One possible danger of floating spreads is that they can't be determined ahead of time, which can increase risk and volatility at certain times of the day. While changing spreads will always be referenced in your trading platform, it's important to find a broker that protects against unnecessary slippage while still allowing for competitive rates. When using floating spreads, it's always important to set trading stops and other rules to limit the effects of market volatility.

Fixed spreads vs Floating spreads

While fixed and floating spreads can both provide advantages to retail traders, floating spreads are often preferred in forex due to their competitive nature. Unlike fixed spreads, which stay the same regardless of underlying market conditions, floating spreads are constantly updated in real time. Not only does this lower trading costs, it also allows traders to measure the liquidity of the market at different times of the day. Along with price and time data, floating spreads add a third dimension to your market analysis, allowing for greater insights and more informed trading decisions.

While floating spreads can increase volatility in certain trading conditions, they are the choice of many professional traders because they allow you to feel closer to the market. This is especially important for day traders and scalpers who rely on real time data changes to make accurate trading decisions. In contrast, fixed spreads can feel dead and out-of-touch with market dynamics. Avatrade offers competitive floating spreads for a wide range of currency pairs, with dynamic trading conditions ensured through powerful software and reliable execution.