Fixed Spreads vs. Floating Spreads: Which one is better?

What do you think is the first important factor that you need to consider when it comes to currency trading in the Forex market? Price, brokers, or accounts? The answer is none of them. The first thing you need to understand before taking your first step into Forex trading is understanding the cost of the business.

As we all know, Forex trading involves a tremendously high level of risks. Forex trading is a business like no other, where the cost itself cannot be precisely calculated. You face the cost while conducting the trade which can happen within fractions of a second due to currency price movements.

👌 This cost is called Spread.

Spread will be your very first challenge when you decide to become a Forex trader. It is the cost you will encounter most frequently every time you conduct your trading business.

Spread is the difference between the buying and the selling price of the currency pair itself. For example, if you see the price of EUR/USD displayed as 1.2100/1.2102, it means that the spread for this currency pair is 1.2102 – 1.2100 = 0.0002 or 2 pips.

Moreover, since currency prices change within fractions of a second, it is almost impossible to predict the spread value of the pair’s individual prices; which no longer will be an issue if you decide to trade using fixed spreads.

👉 Fixed spreads are offered at a fixed price, meaning that the value is predetermined and will not depend on the movement of any currency price. Therefore, no matter how much or how frequently currency prices move, the spread will remain the same. Brokers usually determine the value of their fixed spreads somewhere in the range of the existing floating spreads. That is why, sometimes, your fixed spreads value is higher than that of the floating spreads even when the market is quiet.

👉 Spreads that are offered at fluctuating values are known as floating spreads. This type of spread constantly changes depending on the market situation. What’s more, there is no way to predict how much the value of floating spreads changes because it is dependent on the price of each currency pair itself.

Fixed Spreads vs. Floating/Variable Spreads

Now that you have a better idea about the types of spreads in Forex trading, you might ask “Which one is better?”

There is no definite answer to this question. That is because choosing the right type of spread depends on your trading proficiency and circumstances.

✅ 1. Level of Proficiency

Are you a new Forex trader? Or have you been trading in the Forex market long enough to understand how currency prices fluctuate, or how the major factors influence the currency price movements?

Trading forex with fixed spreads is more suitable for new traders. The fixed spread allows you to trade in fixed values anytime you want, regardless of how frequently the price of a currency pair changes. Even if the currency prices move most unexpectedly, you will have nothing to worry about because the fixed spreads value will remain the same. Or at least at a “safer” amount compared to the real market pricing.

Alternatively, floating spread changes depending on the price movement of a currency pair itself. It can move at lightning speed and go from 0 to 10 pips and back many times, especially in highly volatile markets. That is why only experienced traders can anticipate their moves while using floating spreads.

✅ 2. Trading Objectives

The second factor you need to consider is what kind of trading goal you have in mind right now. Are you a day-trader who trades for a living, or do you trade in your spare time for investments?

If you trade Forex on a daily basis, it means that you would have dedicated time to watch the market and learn the price movements. In that case, floating spreads will suit your trading objective better. It is true that floating spreads constantly change, but as a day trader, you can take advantage of these smaller values, especially when the market is quieter.

On the other hand, those who trade less frequently and have no time monitoring the price fluctuations, are better off trading with fixed spreads. That way, they can trade in the same amount of spreads regardless of the time and market volatility.

✅ 3. Appetite for Risks

One of the most crucial factors to consider while choosing fixed or floating spreads is your appetite for risks. Ask yourself, how much risk are you willing to take in Forex trading?

If you like trading under safer and more calculated circumstances, you will love trading with fixed spreads. That is because it enables you to calculate almost every outcome of your trades. Additionally, by trading with fixed spreads, you do not have to pay additional fees because all trading costs are already included in the spreads.

However, if you seek more challenges in Forex trading and want the thrill of unpredictable price movements, floating spreads are the right choice for you.

Whatever you decide, it is always advisable to get enough Forex education and trading experience before making a decision. After all, we know what happens to traders who trade recklessly only for the thrills.

✅ 4. Capital Level

Before deciding which type of spreads you want to take, you need to pay attention to your capital level or the amount of money you have as your initial deposit.

If your capital level is considerably high and you have some spare money, you can probably handle losing a couple of bucks—sometimes hundreds—during your early trades. In that case, floating spreads will be more suitable for your trading activities.

Floating spreads range from 0 to 10 and sometimes even 20 pips, depending on the currency pairs and market conditions. If your capital is limited, floating spreads are a nightmare. You can lose all your money in an instant once the market volatility hits its peak. And the worst thing is that we never know when it happens. Even professionals can only make assumptions and predictions when it comes to market conditions.

Furthermore, fixed spreads are usually higher than floating spreads under normal market conditions. If the floating spreads for a currency pair are in the range of 0 to 7 pips, then a fixed spread may stay at 4 pips no matter how much the currency prices move. You will lose the chance to trade with 0 pip spread but keep your trades away from 7 pips trading. If your capital level is limited, then fixed spreads will help you trade in a more predictable and calculated situation.

✅ 5. Trading Style and Strategies

The last thing to consider when choosing a spread type is your trading style and strategies. Scalpers usually prefer to trade using floating spreads because they simultaneously deal with a number of opened positions during a day.

However, fixed spreads are far more suitable for swing and position traders who work in the medium to long term periods since they will need more stability.

While there are many factors you should consider before choosing your spread type, fixed and floating spreads can only work to your advantage if you understand and calculate all your actions before executing your trades.

That is why it is most crucial that you first prepare yourself with enough Forex education and demo trading before joining the live Forex market. Only after you completely understand how Forex trading works you will be able to make better use of both types of spreads, minimize your costs, and maximize your profits. Happy trading!