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FOREX Basic Strategy 4

 

It will be more beneficial to you if your spread is tight. Nevertheless, tight spreads can only be helpful if it goes along with efficient execution.  
 
The quality of execution will determine whether you actually do get tight spreads. A good example is when your screen shows a tight spread but your trade is packed with a few pips to your disadvantage or is strangely discarded.

When this occurs several times in a row, it means that your broker is showing tight spreads but is actually delivering wider spreads. Rejected trades, delayed execution, slipping, and stop-hunting are methods that some brokers employ in order to get rid of the promise of tight spreads.

Spreads should always be thought of together with depth of book. As odd as it may sound, when it comes to scale economies, FOREX does not even function like most other markets. For example, on the inter-bank market; the bigger the ticket size, the larger the spread will be.
 
 
So when you see a 1-pip spread on an ECN platform, you have to ask yourself if that spread is valid for a $2M, $5M or $10M trade, which it probably might not be. In a lot of cases, the tight spread that is given applies only to capped trade sizes which are very much insufficient for most of the common trading methods.

You’ll find that from one broker to the next, spread policies change a lot, and the policies are often quite difficult to see through. Of course, this makes comparing brokers a lot harder. Some brokers actually offer fixed spreads that are guaranteed to remain unchanged in spite of market liquidity.
 
 
But due to the fact that fixed spreads are traditionally higher than average variable spreads, you will be paying an insurance premium during most of the trading day in order for you to receive protection from short-term volatility.

Depending on market liquidity, other brokers offer traders variable spreads. When there is good market liquidity, spreads will be tighter but they will widen as liquidity dries up. When you decide to choose between fixed and variable rates, the choice will depend on your individual trading pattern.
 
 
If you mostly trade on news announcements that you hear, it might be easier with fixed spreads, but this is only if the quality of execution is satisfactory.

Based on their accounts, some brokers will have different spreads for different clients. For example, clients with larger accounts or who make larger trades may get tighter spreads, whereas clients which are referred to by an introducing broker might get wider spreads so as to cover the referral costs. Some might offer identical spreads to everyone.

Problems can arise when you try to find out about the spread policy of a given company because this information, together with information on trade execution and order-book depth can be hard to find. Due to this, many traders get caught up in hearsay, and take the broker's words at face value. This can become quite risky. The best way to find out is to try out different brokers or to talk to those who can help.

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