The factors that influence the spread

The spread is the difference between the bid and ask. Forex, the spread is counted in number of pips which is the smallest unit of trading on the forex. For example, if the EUR / USD 1.4002/1.4004 side, this means that the spread is 2 (1.4004-1.4002).

A spread can be variable or fixed. A fixed spread means that the spread will remain the same throughout the day. The fixed spreads forex brokers are market makers. They themselves determine the amount of spread they wish to impose on their clients. So the client knows in advance the amount of spread before placing his order. On the other side, there spreads variables. The spread then changes constantly depending on market conditions on the forex. Under normal market, variable spreads are lower than the fixed spreads during economic announcements, but the opposite is true. So there are advantages to each type of spread, your choice will therefore depend on your trading style.

There are two major factors that influence the spread:

- Liquidity: Parity is a more liquid, that is to say there are more players, the higher the spread will be reduced. Indeed, the counterparties are many, competition is fierce and spreads are tightening. It is on the EUR / USD that the spread is the smallest since the parity is the most processed on the foreign exchange market. However, on parity exotic spreads will increase significantly.

- Volatility: The more volatile equity is more than the spread will be. It is in times of significant economic announcements that spreads are larger because the movements can be significant. Similarly, a parity with high daily volatility will have a spread greater than parity with low volatility. On the GBP / CHF example (Sterling / Swiss Franc), volatility is high. It is not uncommon for movements of several hundred pips intervene in the day. However, the EUR / USD, the movements are smaller and therefore the spread is it smaller. The economic announcements only reinforce this volatility in the forex and it's not uncommon to see a spread of 6 or 7 on the EUR / USD, whereas in normal market conditions, the spread is 2.