Fixed or variable spreads in Forex?

Forex variable spread

There is the myth in the Forex retail market that the variable spreads are better than fixed ones.

This myth is based in the fact that all real markets in the World have variable spreads, depending on the offer and demand of each moment.

That is true.

This is particularly obvious in the real stock markets or in futures and interbank Forex.

From that point of view it is true that we should only be interested in brokers that offer us variable spreads that reflect the real conditions of the market with the corresponding price and volume.

In some efficient markets like futures, we should have variable spread constantly, due to the fact that even that there is a huge volume, sometimes there are small “gaps” in the market.

Forex spreads
The spreads in forex change a lot actually

Here we are trading a fair market, as well as when we trade Apple or Facebook stocks in the traditional brokers.

If we have any problem we can check the official price data.

The problem with Forex is that markets are decentralized and although there is a real market, the interbank, we do not know certainly if we are trading the real thing or not. In fact the reality is that we will not be trading that market but an internal market maker broker market so to speak.

The fact that they say they are ECN does not mean that we are in the interbank market.

We are, however trading in the “real market” of a market maker.

Variable spreads and scalping

One of the great lures of brokers with this issue is the fact that they offer the possibility of doing scalping, which is supposedly a very good way of making money in the markets.

The great majority of Forex brokers offer ECN type accounts in which there are no restrictions to scalper traders. That is why they are so loved by scalpers, signal vendors and automated systems developers so they can put into practice their strategies.

Spread Forex definition

There is a lot of confusion with this matter.

For example, some brokers say they offer a Dealing Desk account for deposits up to 1,000 pounds or dollars, and a Non Dealing Desk (NDD) for accounts bigger than 1,000.

How do we know we are trading in a genuine ECN broker?

How do we know the ECN broker provider is not another market maker?

How do we know that the broker providers have not Dealing Desks?

Evidently, we do not know.

Variable and fixed spread difference

That is why this matter of ECN, STP and market makers world is so confusing. There is a lot of field for deceit.

I have used ECN brokers of a supposed big quality which eventually had big problems with their liquidity at night, having hundreds of pips in strange gaps due to problems in “liquidity”.

I am talking about brokers with variable spread very low 95% of the time, a lot lower than those with fixed spreads.

In fact when I used to have those problems with so-called ECN brokers the fixed spread ones did not gave me any trouble with such bizarre moves overnight.

Fixed spread brokers

It is evident that the so-called ECN brokers are directed to scalpers or frequent traders and not very interested in long term trading.

The sole mention of “scalping” makes people believe in some sort of magic properties, as if the word has some sort of super-professional connotations.

In reality there are professional traders but they are not the type of scalpers people think of.

ECN brokers just need to charge some trading commission, leaving the spread for their providers and they can make a good living out of it.

The problem of low spreads, variable or not, is not the spreads in itself but the system we use to trade them, which is always related to day trading or scalping.

You will not win in the long run there, independently of the spread.

You might have one day no commissions or no spread but be sure they will always charge you in other ways.

The false myth of low spreads

Besides, we have the problem of the so-called very low spreads, which in fact are not that low.

On the one hand we have the fact that these accounts normally will have to pay 7 dollars round turn, which is equivalent to 0.35 pips either buying or selling (0.7 pips in total).

The fact that we have a 0.4 spread most of the time does not mean it will be our real cost in trading.

It is only needed that the spread increases to 3 or 4 pips during one second so our effective trading cost rises dramatically.

How do we know that some of the spread “punctual” increases are not market maker tactics to sweep the floor with traders’ accounts?

Thus, we have that our supposed great ECN brokers usually increase the spread at least a couple of times every hour, when there are some sort of news, sometimes in a dramatic way.

When you do the numbers, you realize that the supposed variable spread in Forex is not your best friend.

In this sense, stock indexes spreads, whether in futures or CFDs offer much more stability that those of Forex.

The most liquid market in the world, really?

What is the point of having a so-called super-ECN Broker with 1 pip as an average AUDUSD or NZDUSD spread if we can see it incremented by 20 in any piece of news we get, or sometimes at night get 100 pips spikes (I have experienced things like this often).

Scalpers or day traders will tell us that night trading does not count since they only trade at night.

I answer to them: “the majority of traders losing in the long term are day traders, and yours 0.3 pips of spread are not maintained during many parts of the day even”.

It is clear that the problems I talk about that appear in the night are described from a point of view of a swing or medium term trader, who leaves his positions open during several weeks or months and who is not interested in this kind of “200 pips price spikes” at night.

That is even more ridiculous when you see that other brokers you can use like some fixed spread ones did not give you that sort of problem.

There is when you realize that the supposed gigantic interbank market is not the one you are trading in the ECN broker.

Winning is very difficult in Forex, even if you do swing trading.

The fact that you have to deal with such big increases in spread in the famous “news” or at night is something you have to count on. On indexes trading on the other hand you do not have such problems.

Sometimes I laugh when I see that typical phrase: “trade the most liquid market in the world”.

You can trade that market, for sure.

But it is not the most liquid in the World, at least not for retail traders.

Original article: ¿Spreads variables o fijos en Forex?