When you trade the foreign exchange rate you need to consider the spreads that you are going to be getting. The spreads that you get can affect the way that you trade and the profits that you are able to get. There are a number of ways that you determine what the right spread is for you and the trading that you are going to be doing. You have to consider the scheme that your broker is use, the strategy that you are using for the market and the foreign exchange rate that you will be trading.
The Spreads that Brokers Offer
The spreads that brokers offer come from two different spread schemes. These schemes are the variable and the fixed spread schemes. The variable spread is the more common of the two spread schemes that are used. You need to consider this when you look at the spreads that you are able to get.
The variable spread will change depending on the market conditions and what big events are coming. When the market is good then the spreads are going to be tighter. However, this is not always the case with the spreads and you need to keep this in mind. The fixed spreads will be set at a single rate and they will not change. This means that when the market is doing well the spreads will be the same as when the market is doing badly.
Spreads and Strategies
When you consider the spreads you are getting you will need to consider them in relation to the strategy that you are using. There are certain strategies that require very tight spreads. However, there are other strategies that allow you to absorb the spreads which means that they do not have a large impact on what you are doing.
The strategies that generally need to have tight spreads are the short-term trading strategies. When you use these strategies you are going to be looking at smaller profits. If you have a wider spread then the amount of profit that you make is going to be lower on the same movement with a tighter spread. Long-term traders generally do not have to worry as much about the spreads that they are getting. The nature of their trades means that they are going to absorb the cost of the spread in the overall movement of the market.
The Foreign Exchange Rate
When you trade on the forex market there are a number of different currency pairs that you can trade. The spread that you get will be impacted by the currency pair that you are looking to trade. The more commonly traded currency pairs will have tighter spreads. This is due to the volume that is traded and the prices that the broker is able to get for these pairs.
When you are looking at a more exotic foreign exchange rate then you are going to have a problem. These currency pairs will generally have wider spreads because of the lower number of trades that are completed. With these currency pairs you may want to consider the fixed spreads instead of the variable spreads.