In forex trading, we will encounter a term called the spread. This spread involves two prices which are the bid and ask price. Your forex broker will give you a bid price quote, and an ask price quote separately for a currency pair. The bid price is the amount that someone can sell the base currency, while the ask price is the amount that someone can buy the base currency. The difference between the ask and bid price is the spread, also known as the bid-ask price.
What is a fixed spread?
A fixed spread is a type of forex spread that is pretty self-explanatory as their name suggests the same meaning. They are spreads that stay constant regardless of the market condition. In short, this spread will not change anytime, even when the market becomes highly volatile.
Forex brokers who use the dealing desk models are usually the ones who offer fixed spreads. These brokers buy significant positions from their liquidity providers and then offer them smaller portions to different traders. DD brokers are market makers. They take the sides of the other client’s side of the trade. Since these brokers have a dealing desk model, they can offer fixed spreads, and they can control the prices displayed to their clients.
The benefits a trader can get from a fixed spread
Trading with fixed spreads benefits people who have tight budgets the most. It is much cheaper to trade with a fixed spread because it requires a smaller capital. A fixed spread can also help a trader monitor the transaction costs since they remain constant. A trader will always know how much he will have to pay to open a new trade.
The downsides of trading with a fixed spread
Trading with fixed spreads does not only come with good things alone. It also has its fair share of adverse facts.
Since the forex broker is the one who calls the shots when it comes to pricing, he can always re-quote the price in a fixed spread trading. The forex broker re-quotes when the market experiences extreme volatility. Fixed spreads indeed remain constant, and the broker cannot widen the spread of changing market conditions. But here is what he can do: he will block your trade once you enter a specific price, and he will ask you to accept the new price. This situation is a new price re-quote.
Later on, you will see a re-quote message on your trading platform that makes you aware that the price changed. The trading platform will reconfirm if you accept this price since these prices are not as desirable as the one you initially ordered.
There is also an issue of slippage. As the prices move fast, the broker is unable to maintain a fixed spread. This means that the fixed spread and the price you used to enter a trade will not be the same.
As a conclusion
Aside from a fixed spread, another type of spread is called a variable or floating spread that no dealing desk brokers usually offer. It is essential to know which kind of trader you are together with your preferred trading style and technique. A fixed spread is not better than the variable and vice versa as it mostly depends on the trader.
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