It
will be more
beneficial to you
if your spread is
tight.
Nevertheless,
tight spreads can
only be helpful if
it goes along with
efficient
execution.
The
quality of
execution will
determine whether
you actually do
get tight spreads.
A good example is
when your screen
shows a tight
spread but your
trade is packed
with a few pips to
your disadvantage
or is strangely
discarded.
When
this occurs several
times in a row, it
means that your broker
is showing tight
spreads but is actually
delivering wider
spreads. Rejected
trades, delayed
execution, slipping,
and stop-hunting are
methods that some
brokers employ in order
to get rid of the
promise of tight
spreads.
Spreads
should always be
thought of together
with depth of book. As
odd as it may sound,
when it comes to scale
economies, FOREX does
not even function like
most other markets. For
example, on the
inter-bank market; the
bigger the ticket size,
the larger the spread
will
be.
So
when you see a
1-pip spread on an
ECN platform, you
have to ask
yourself if that
spread is valid
for a $2M, $5M or
$10M trade, which
it probably might
not be. In a lot
of cases, the
tight spread that
is given applies
only to capped
trade sizes which
are very much
insufficient for
most of the common
trading
methods.
You’ll
find that from one
broker to the next,
spread policies change
a lot, and the policies
are often quite
difficult to see
through. Of course,
this makes comparing
brokers a lot harder.
Some brokers actually
offer fixed spreads
that are guaranteed to
remain unchanged in
spite of market
liquidity.
But
due to the fact
that fixed spreads
are traditionally
higher than
average variable
spreads, you will
be paying an
insurance premium
during most of the
trading day in
order for you to
receive protection
from short-term
volatility.
Depending
on market liquidity,
other brokers offer
traders variable
spreads. When there is
good market liquidity,
spreads will be tighter
but they will widen as
liquidity dries up.
When you decide to
choose between fixed
and variable rates, the
choice will depend on
your individual trading
pattern.
If
you mostly trade
on news
announcements that
you hear, it might
be easier with
fixed spreads, but
this is only if
the quality of
execution is
satisfactory.
Based
on their accounts, some
brokers will have
different spreads for
different clients. For
example, clients with
larger accounts or who
make larger trades may
get tighter spreads,
whereas clients which
are referred to by an
introducing broker
might get wider spreads
so as to cover the
referral costs. Some
might offer identical
spreads to
everyone.
Problems can arise when you try to find out about the spread policy of a given company because
this information, together with information on trade execution and order-book depth can be hard to find. Due to this, many traders get caught up in hearsay, and take the broker's words at face value. This can become quite risky. The best way to find out is to try out different brokers or to talk to those who can help.
Go to the next step in your free Forex Trading Guide by clicking here
|