The lowest possible spreads in any financial market are in the form of variable spreads rather than fixed spreads. A variable spread is always the best possible spread price a broker can offer at any given moment. As the name suggests, variable spreads vary in price depending on the liquidity of the markets. In markets of high liquidity, the spread tends to be very low, while in slow moving markets, the spread can be quite high. The spread can be highly volatile depending on the market news as well, and also varies depending on which markets are open. For example, the spread on trading the JPY/USD currency pair will vary depending on whether the Japanese market is open or not. Traders who frequently trade with variable spreads need a certain level of experience so that they can time the markets with the assets they trade. As well, they must be fully aware and alert of the news and announcements that are happening to take advantage of the low spreads they can create.show more
For the experienced trader, variable spreads can be quite advantageous for them. See some of the benefits variable spreads offer these traders below.
Tight Spreads – Probably the biggest advantage of variable spreads is the ability to achieve very tight spreads. If the market conditions are right, trading with variable spreads can prove to be very profitable, especially in certain markets and at certain times.
Excitement – Variable spreads make trading that much more interesting as it presents another strategy to master. Trader who know how to make the most of variable spreads can be more profitable than traders who only trade with fixed spreads.
While many traders prefer to trade with variable spreads, some do not. See below some of the risks and disadvantages of trading with variable spreads.
Price Uncertainty – Variable spreads mean that the price of a spread can change at any point of time. Inexperienced traders might make trades at the wrong time when spreads are very high due to market news, or simply from the time of day. A trader has no sure way of managing these prices and maintaining a steady spread.
Shot Term Trading is Unfavorable – The forex markets are very volatile with their price movements. Therefore, the spread can easily change very quickly. Short term traders such as scalpers may end up losing if they make too many trades while the spread is high. Their strategy is to make many small gains, but if the spread is too wide, the fees outweigh the gains.
Requires Experience – Variable spreads are often more attractive to experienced traders as it requires greater skill to know when and what to trade for achieving tighter spreads. The market news, market hours, and the markets themselves all impact the size of a spread.