FLOATING SPREAD VS FIXED SPREAD

6月3日

🌐 The trading conditions of any account specify the type of spread: floating or fixed. As a rule, the value of a fixed spread is larger, but a floating spread has an insidious wording “from...” in the terms and conditions. This means that the floating spread may well be greater than the fixed one. Nevertheless, it is considered better. What are its advantages and disadvantages, what spread to choose?


📍 ADVANTAGES AND DISADVANTAGES OF FLOATING SPREAD

▶️ FIXED SPREAD
The difference between the buy and sell price of an asset is constant. This indicates that the broker works according to Straight Through Processing (STP) model - directly with a specific liquidity provider, the size of the spread with which is pre-agreed. The broker charges its commission (markup) and the trader sees the final difference. The fixed spread is only theoretical. Often in the offer there is a clause that the broker can unilaterally change it. And broker does it at the moment of news release, when volatility increases sharply.

▶️ FLOATING SPREAD
The difference between price/offer is formed by the market. The broker only adds its small commission, that's why there are no zero spreads.

Floating spreads are set on ECN accounts, where orders are not placed to a specific liquidity provider, but to the general market. Such accounts have a high entry threshold and a fixed commission for each lot placed on the account.


📍 THE FLOATING SPREAD DEPENDS ON:

🔘 Market Liquidity. During the vacation season, on the eve of vacations, at the moment of flat trading activity decreases. The smaller the volumes and the fewer traders, the bigger the gap between Bid and Ask prices.

🔘 Currency Liquidity. Or investors' interest. The EURUSD pair is liquid, the pair of the US dollar with the South African rand is called exotic and the spread on it is one of the largest.

🔘 Volatility. Or the speed of trend movement. If after the news release the imbalance of bids in the direction of buyers or sellers sharply increases, the spread will also grow.

🔘 Time of day. Or the period of activity of traders of this or that region.


📍 ADVANTAGES OF A FLOATING SPREAD:

➡️ Most of the time it is less than the fixed spread.

➡️ No requotes - the transaction is executed in any case.

➡️ Floating spread is more profitable than fixed spread for liquid currencies. Fixed spread is more profitable for “exotics”.

➡️ It is favorable for scalping, where every tenth of a point is important for profit.


📍 DISADVANTAGES OF FLOATING SPREAD:

➡️ There are slippages at the moment of sharp spread widening.

➡️ It is necessary to constantly monitor its change.

➡️ It can sharply increase when a fundamental factor appears.

➡️ There is still a risk of artificial spread widening by the broker (it is not easy to prove).

➡️ Increases emotional tension. With a fixed spread a trader always knows the amount of expenses. Expansion of a floating spread can turn a profitable trade into a losing one.

If you open a new account with a broker, pay attention to the following points. In what cases the broker has the right to change the fixed spread. What quotes we are talking about. Outdated data on the website may turn out to be conditions for 4-digit quotes.

Compare spreads at different brokers on a demo account; install a script showing the current spread. Run it on one asset, watch how and when the floating spread might widen.


📍 CONCLUSION
The choice between a fixed spread and a floating spread depends on several factors, including market liquidity, currency pair, volatility, and time of day. While fixed spreads offer a set and predictable price difference, floating spreads can be more competitive and profitable, especially for scalping strategies. However, floating spreads also come with risks, such as slippage and the need to constantly monitor spread changes. When opening a new account with a broker, it's essential to pay attention to the terms and conditions, clarify quotes, compare spreads across different brokers, and test the floating spread on a demo account.

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