What Is The Difference Between Fixed and Variable Spreads?
We are often asked, ‘what is the difference between a fixed spread broker and a variable spread broker‘, and so we figured it was wise to put together an article on the subject.
The spread is simply the difference between the bid and offer (buy and sell) price, and is the most common charge when it comes to trading. For instance, if the Wall St 30 index was quoted as 30,000 – 30,002 on a broker’s trading platform, the spread on that market is 2 points.
It is common knowledge that, the lower or smaller the spread, the cheaper it is to trade. The wider or bigger the spread, the more expensive it is to trade.
There are two types of spread – fixed and variable – more on each below.
This type of spread is constant and you will know exactly how much you are paying for each and every trade.
Fixed spread brokers will list their spreads and that spread is exactly what you will pay to trade. For instance, TD365 are a fixed spread broker, and they clearly list their spreads on their website and platform. As an example, their spread on the popular Wall St 30 index is just 1 point during US trading hours, and their spread on EUR/USD is just 0.6 pips 24/5!
So, if you make a $10 per point trade on EUR/USD, you know that your cost of trading will be $6 ($10 x 0.6). That is a fixed spread and fixed spreads do not widen, even during times of extreme market volatility.
Some Benefits of Fixed Spreads
Fixed spreads are upfront and transparent. Do not get caught out with surprising spread charges that eat into profits due to a broker widening the spread and increasing the cost of trading.
Lower trading costs
Typically, fixed spread trading is cheaper than variable spread trading.
Fixed spreads allow you to plan and factor in your cost of trading; variable spreads do not.
In times of volatility, fixed spreads provide much better value for traders, whereas variable spreads will move around, creating uncertainty.
Unlike fixed spreads, variable spreads do not remain constant – they are constantly changing throughout the day, depending on volatility. We would say that the majority of brokers offer variable spreads over fixed spreads.
Variable spread can be cheaper than fixed spreads, although we are yet to find a variable spread broker that regularly beats a fixed spread broker, particularly in times of market volatility.
Not to say that variable spread brokers are wrong or ripping you off – there are many great variable spread brokers – however, when it comes to transparency of costs, a fixed spread broker is more appealing in our eyes.
Variable Spread Example
Broker ABC offers variable spreads and it’s EUR/USD spread starts from 0.1 pips.
This means that at some point during the average day, you might be able to trade from 0.1 pip, which is amazing value. However, receiving this low spread (0.1) is highly unlikely, particularly when the markets are volatile.
Luckily, most variable spread brokers also list their “average spreads” on their website/s. This shows what their typical spread for each market will be. For instance, Pepperstone promote their EUR/ USD “from 0 pips” but the average spread for that FX pair is actually around 0.70. Expect to pay 0.70 when you trade EUR/USD with Pepperstone, not 0.1!
Conclusion: Which One Is Better?
We are all different and a lot of people prefer variable spreads to fixed spreads, and vice versa.
For us, however, we much prefer fixed spread brokers. We cannot go past the fact that with fixed spreads, you know how much you are paying to trade, each and every time. With variable spreads, you do not know and spreads can widen in a heart beat so for us, fixed spreads all the way!