In forex, a spread is the difference between a currency's buy and sell prices. Basically, the spread represents a forex company's main source of profits. The way profits are obtained is very simple: a brokerage or dealer always sells a currency for a higher price than it buys it. The spread is how brokerage companies cover their expenses and generate profits. In effect, the spread is a kind of commission taken from the trader for each transaction.
How does spread size affect trading? Obviously, the smaller the spread on trading instruments, the better. However, the kind of trading must be taken into consideration. For traders holding open positions for several days, weeks, or even months, spread size is virtually irrelevant. By focusing on long-term investments, you can ignore the spread size, because in this case the total number of transactions for a certain period of time is small, which means the total costs due to spreads will also be small.
For those who trade in short time frames, performing a large number of transactions in a day, the relevance of the spread size increases sharply. If the chosen forex trading strategy calls for thousands of transactions per day, then spread sizes become the most significant trading factor. Given a large number of transactions, reducing spreads decreases a trader's costs.
An instrument's spread can change (such spread is called floating) or be constant (it is called a fixed spread in this case).
Fixed spreads can be useful in a highly volatile market, but only if the quality of order execution is maintained during large movements, which rarely occurs. Generally, the quality of order execution is maintained for a relatively short period of time. One more factor must be considered: periods of high volatility on the forex market are quite rare. We may therefore conclude that only a few highly-experienced professional traders who can correctly predict the market's behavior will be able to fully take advantage of these periods.
What can we say about "floating spreads"? Also known as dynamic spreads, these spreads accurately reflect the prices of trading instruments and how quickly those prices are changing. They are more realistic and sought after for predicting market behavior and determining where trends are going.
To successfully trade with dynamic spreads it is important that a trading strategy account for the possibility of the spread expanding. This is quite simple to do - periods of expanding spreads are brief and easily predictable. However, avoiding losses in these periods requires a certain reserve of funds in your trading account, which will let you survive a short-term drawdown, or simply refraining from trading on news that will induce abrupt changes in exchange rates and expanded spreads.
EXNESS specialists systematically research ways to improve interactions with liquidity providers. The use of advanced technology has produced unsurpassed results: at EXNESS the spreads on the main currency pairs are currently substantially lower than those offered by our competitors.
By reducing client costs, tight spreads are one of the key factors in making forex trading more profitable (this is most relevant for traders with a large number of transactions). However, when discussing the advantages of floating spreads, the other components of successful trading must also be remembered. First of all, this means the quality of order execution: the speed of order execution at EXNESS is 0.1 - 1 second.
Moreover, EXNESS specialists have minimized the number of requotes and virtually eliminated slippage for all pending orders executed three hours after trading opens for a particular forex instrument. At EXNESS we're always ready to hear the wishes and suggestions of our many clients, so we can take them into consideration when implementing plans to improve all aspects of our work.