Tag: Fixed Spreads

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Forex Market

Fixed Forex Spreads vs Floating Spreads: Which is Should I Choose?

When you’re searching for a broker, you’ll find many different account types and options when it comes to fees, available assets, funding methods, and so on. One of the major things that traders look at are the spreads offered by various brokers, as the differences in these fees can be large and will make a […]

When you’re searching for a broker, you’ll find many different account types and options when it comes to fees, available assets, funding methods, and so on. One of the major things that traders look at are the spreads offered by various brokers, as the differences in these fees can be large and will make a […]

When you’re searching for a broker, you’ll find many different account types and options when it comes to fees, available assets, funding methods, and so on. One of the major things that traders look at are the spreads offered by various brokers, as the differences in these fees can be large and will make a big impact on the amount of profits that you actually bring home. Brokers generally profit through two different fees – commissions and spreads. The spread is the difference between the bid and ask price on an instrument. For example, on the pair EURUSD, an average spread is around 1.5 pips. 

However, some brokers widen the spread to 2 pips or even higher, which puts clients at a disadvantage. Much like comparing car insurance, traders need to be able to compare the spreads offered on different account types and through different brokers to find the best deal possible. Otherwise, they will lose a great deal of profits to inflated fees when they could have chosen a broker that offered more competitive pricing.

As mentioned above, you want to look for spreads of around 1.5 pips on the pair EURUSD. Don’t expect to see this on every available instrument, as spreads on exotics and some minor currency pairs can climb much higher. If you see a good spread offer, you still aren’t done, as you’ll need to know whether the spread is floating or fixed. 

Floating spreads are more common in the forex market and this means that the difference between the bid and ask price is constantly changing. If a broker advertises floating spreads from 1 pip on a currency pair, you still might see a spread of 1-2 pips or higher for that same pair. Brokers are also likely to charge commission fees if they offer a floating spread. You’ll want to check to see if the broker lists each instrument they offer and the starting spreads for each pair on their website so that you can see the different starting spreads. If a broker advertises starting spreads from 1 pip but doesn’t go into more detail, you should expect to see this on some major currency pairs with higher spreads on other instruments.  

Unlike floating spreads, which constantly change, fixed spreads are set at their exact value and give traders a more solid foundation of knowing exactly what they will pay. The downside with this type of spread is that it is usually higher than the lowest point with a floating spread. For example, if the broker offers floating spreads from 1 pip on EURUSD, you might see a fixed spread of 2 pips or higher for the same pair. Low fixed spreads are advantageous, while higher fixed spreads mean you will wind up paying more money to trade. 

When it comes to deciding which type of spread is better, you’ll have to take a look at each broker’s specific offer. You also might have to look around if you prefer a certain type of spread, as many brokers only offer one type or the other, while some offer different account types with different kinds of spreads. In our opinion, the best kind of spread is fixed, but it must be narrow. If the spread is fixed at a high value, it is usually better to go with a floating spread.

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Forex Assets

Analyzing The CAD/JPY Forex Asset Class

Introduction

Introduction

Introduction

CADJPY is the abbreviation for the currency pair, the Canadian dollar against the Japanese yen. This pair is one of the most extensively traded cross currency pairs. In CADJPY, CAD is referred to as the base currency and JPY as the quote currency.

Understanding CAD/JPY

The value of CADJPY is the value of JPY, which is required to purchase one CAD. It is quoted as 1 CAD per X JPY. For example, if the current market price of this pair is 82.651, then these many units of Japanese yen are needed to buy one Canadian dollar.

Spread

The bid price is the price used to sell a currency, and ask price is the price used to buy a currency. There is always a difference between the two prices. This difference is called the spread. It varies from broker to broker and also the type of their execution model.

ECN: 1.1 | STP: 2

Fees

Similar to stockbrokers, there are forex brokers who charge a few pips of fee on each position a trader opens and closes. This fee is no different from the commission brokers levy. On STP accounts, the fee is nil, while on ECN accounts, it is between 6-10 pips depending on the broker one is using.

Slippage

Slippage in trading is the difference between the price requested by the trader and the price he actually received. The two factors responsible for slippage are,

  • The volatility of the market
  • Broker’s execution speed

Trading Range in CAD/JPY

A trading range is a tabular representation of the number of pips a currency pair moved in a given timeframe. It represents the minimum, average as well as the maximum pip movement in six different timeframes. These values prove to be important for assessing one’s risk on a trade. For example, if the minimum pip movement in CADJPY on the 4H timeframe is ten pips, then a trader can expect to lose $917 in about 4H.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can determine a large period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

CAD/JPY Cost as a Percent of the Trading Range

As already mentioned, there is a fee for every trade you take. And knowing the percent fee on the trades you are taking is important, as it depends on the volatility of the market and the timeframe you are trading.

Below is a representation of the total cost variation on trade in terms of percentages. Since costs on ECN accounts are different from STP accounts, we have two separate tables for this concept.

ECN Model Account

Spread = 1.1 | Slippage = 2 |Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 1.1 + 1 = 4.1

STP Model Account

Spread = 2 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 2 + 0 = 4

The Ideal way to trade the CAD/JPY

Before getting right into it, let us comprehend the above tables. The higher the values of the percentages, the higher are the costs on the trade. It is pretty evident from the table that, percentage values are on the higher side in the min column and comparatively lower in the max column. This means that the costs are high when the volatility of the market is low and vice versa. Also, the trades that are taken based on a long term perspective, the costs are considerably low.

One may trade the high volatility markets to minimize your costs, or trade during low volatility by paying high costs. However, it is ideal to enter during those times of the day when the volatility is close to the average values. During these times, one can expect comparatively low costs with enough volatility as well.

On a further note, another simple and effective way to reduce costs is by trading using limit orders. This entry method will take slippage out of the total costs and bring down its value considerably. An example of the same is given below.

Spread = 2 | Slippage = 0 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 0 + 0 = 2

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Forex Assets

Exploring The Basics Of GBP/CAD Forex Pair

Introduction

Introduction

Introduction

GBPCAD pronounced as ‘pound cad” is minor/cross currency pair in forex. GBP refers to Great Britain Pound, and CAD refers to the Canadian Dollar. Since GBP is on the left, it becomes base currency, and CAD on the right becomes the quote currency.

Understanding GBP/CAD

The current market price has of GBPCAD is not similar to the prices in the stock market. The value of GBPCAD represents the value of CAD equivalent to one GBP. It is simply quoted as 1 GBP per X CAD. For example, if the value of GBPCAD is 1.7192, then 1.7192 Canadian dollars are required to purchase one pound.

GBP/CAD Specification

Spread

Spread is the difference between the bid price and the ask price in the market. These values are controlled by the brokers. So, it differs from broker to broker as well as the type of account.

ECN: 0.8 | STP: 1.9

Fees

There is a small levied by the broker on every trade a trader takes. There are a few pips of fee on ECN accounts, while the fee is nil on STP accounts. The fee is usually between 6 to 10 pips.

Slippage

Slippage is the difference between the trader’s demanded price and the real executed price. Slippage happens when orders are executed by the market price. It happens solely due to the volatility of the market and the broker’s execution speed.

Trading Range in GBP/CAD

A trading range is the representation of the pip movement of GBPCAD in different timeframes. These values are helpful in getting a rough idea of the profit/loss that can be made from the trade in a given timeframe. For example, if the min pip movement on the 1H timeframe is 3 pips, then a trader can expect to gain/lose at least $22.38 when one standard lot is traded.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

GBP/CAD Cost as a Percent of the Trading Range

Now that we know how much profit/loss can be made within a given time frame let us also calculate the cost on each trade by considering the volatility and timeframe. For this, the ratio between the total cost and volatility calculated and expressed in percentages. The magnitude of these percentages will then be used to determine the timeframe with marginal costs.

ECN Model Account 

Spread = 0.8 | Slippage = 2 |Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.8 + 1 = 3.8

STP Model Account

Spread = 1.9 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.9 + 0 = 3.9

The Ideal way to trade the GBP/CAD

From the above two tables, it can be ascertained that the percentages largest on the min column, moderate on the average column, and least on the max column. The higher the value of percentages, the higher is the cost of the trade. So with this, we can conclude that the costs are high during low volatility, and low during high volatility. Similarly, the costs are high on lower timeframes and considerably low on higher timeframes. Hence, to keep volatility and cost at a balance, it ideal to trade when the pip movement in the market is around the average values.

Market orders bring in an additional cost in the trade. To eliminate this, one can trade using limit orders. This will set the slippage value to 0, and eventually, reduce the total cost on the trade by a significant amount. An example supporting the statement is illustrated below.

Total cost = Spread + trading fee + slippage = 0.8 +1 + 0 = 1.8

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Forex Assets

Fundamentals Of Trading The GBP/AUD Currency Pair

Introduction GBPAUD is an abbreviation for the Great Britain pound and the Australian dollar. This cross currency pair is widely traded with high volume in the forex market. In this pair, GBP is the base currency, and AUD is the quote currency. Understanding GBP/AUD The value of GBPAUD in the market is the value of […]

Introduction GBPAUD is an abbreviation for the Great Britain pound and the Australian dollar. This cross currency pair is widely traded with high volume in the forex market. In this pair, GBP is the base currency, and AUD is the quote currency. Understanding GBP/AUD The value of GBPAUD in the market is the value of […]

Introduction

GBPAUD is an abbreviation for the Great Britain pound and the Australian dollar. This cross currency pair is widely traded with high volume in the forex market. In this pair, GBP is the base currency, and AUD is the quote currency.

Understanding GBP/AUD

The value of GBPAUD in the market is the value of AUD equivalent to one pound.GBPAUD is quoted as 1 GBP per X AUD. For example, if the value of GBPAUD is 1.8505, then these many Australian dollars are to be given to receive one pound.

GBP/AUD Specification

Spread

The prices for buying and selling a currency pair are different. To buy, one must refer to the ask price; and to sell, one must refer to the bid price. The difference between the bid price and the ask price is called the spread. The spread varies from the type of account model.

ECN: 0.7 | STP: 1.7

Fees

Apart from the spread, brokers levy fee on every round-trip trade. This fee is fixed in for every trade. However, it varies from broker to broker. Usually, there is no fee on STP accounts. On ECN accounts, there is a fee of a few pips.

Slippage

Slippage is the difference between the price when the trader entered the market order and the price he was actually given. Most of the time, there is a variation in the prices. This difference could be in favor of or against the trader. There are two factors responsible for it. One, the volatility of the market, and two, broker’s execution speed.

Trading Range in GBP/AUD

The trading range of currency pairs simply depicts the volatility of the pair in a different timeframe. In other terms, the trading range represents the minimum, average, and maximum pip movement in different timeframes. These values are helpful in assessing one’s risk, as well as making trades much cost-effective.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can determine a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

GBP/AUD Cost as a Percent of the Trading Range

Cost as a percent of the trading range is a very supportive tool in analyzing the cost of a trade, in different timeframes, and at different volatilities. This is done by finding the ratio of the total cost and volatility values and then expressing it as a percentage. The comprehension of the below tables shall be discussed in the subsequent topic.

ECN Model Account 

Spread = 0.7 | Slippage = 2 |Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.7 + 1 = 3.7

STP Model Account

Spread = 1.7 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.6 + 0 = 3.7

The Ideal way to trade the GBP/AUD

Note that the higher the magnitude of the percentage, the higher is the cost of the trade. From the table shown above, we can observe that the values are highest on the min column and lowest on the max column. This means that the costs are higher when the volatility of the market is low and vice versa. Reading it horizontally, the cost gets lower as the timeframe widens. Hence, the ideal to trade when the pip movement of the currency pair is near the average values. This will ensure decent volatility by keeping the costs minimal.

Another effective way to reduce the total cost is by trading using limit orders, not market orders. Doing so, the slippage on the trade will shrink to zero. The following table shows the costs of the GBP/USD with no sleppage, for the same market conditions as on the preceding tables.

Total cost = Spread + trading fee + slippage = 0.7 +1 + 0 = 1.7

Hence, from the above table, it can be inferred that the cost percentages have a significant value.

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Forex Course

40. Two Different Types Of Spreads In The Forex Market

In the last lesson, we clearly talked about what Spread in forex is and also how it is calculated. In this lesson, we will dig up a little more on the concept of spreads and understand its types.

In the last lesson, we clearly talked about what Spread in forex is and also how it is calculated. In this lesson, we will dig up a little more on the concept of spreads and understand its types.

In the last lesson, we clearly talked about what Spread in forex is and also how it is calculated. In this lesson, we will dig up a little more on the concept of spreads and understand its types.

In Forex, the spread is of two types:

  • Fixed spread
  • Variable/Floating spread

Fixed spreads are typically offered by Dealing Desk brokers, whereas, Variable spreads are offered by No Dealing Desk brokers. Let’s understand both in detail.

Fixed Spreads in Forex

As the name pretty much suggests, Fixed spreads remain the same regardless of the condition of the market. Be it a volatile or non-volatile market, the spread always stays the same.

As mentioned, these spreads are usually offered by Market Makers type of brokers.

Dealing Desk brokers buy a large number of positions from their liquidity providers and then offer these positions to traders (clients). Since the brokers will own these positions, they can control and display the prices to their clients with a fixed spread.

Why choose Fixed Spreads?

  • Fixed spreads do not require a large capital to trade. So, fixed spread brokers offer an alternative for traders who don’t have much cash to begin with.
  • “Fixed” spread itself is an advantage. Fixed spreads make it easy to calculate the transaction costs. And since spreads always remain constant, you will exactly know how much amount you will be paying to the broker for each trade.

Variable Spreads in Forex

Again, as the name suggests, Variable spreads are the spreads that are constantly changing, just like the exchange rates. That is, as and when the bid and ask price changes, the difference between the two changes. This, therefore, changes the spread as well.

This type of spread is offered by Non-Dealing Desk brokers. These brokers obtain the prices from multiple liquidity providers and directly pass on these prices to the traders without the involvement of a dealing desk. This means that NDD brokers do not have control over the spreads. It all depends on the market’s supply and demand and its overall volatility.

As a typical tendency of the market, when there is an economic event, the spreads widen. And same is the case when the market volatility drops.

Advantages of Variable spreads

  • Variable spreads diminish the experience of requotes, where requote is the difference in the price you hit the buy/sell and the price when your order reached the broker. However, this doesn’t mean that you won’t experience slippage.
  • Variable spreads provide transparent pricing, as you will be getting the prices from multiple liquidity providers, which in turn means better prices due to high competition.

If you’re wondering which type of spread you must choose? Well, it completely depends on the type of trader you are. For example, traders with small accounts who trade occasionally can go with a broker that offers fixed spread, whereas, a trader who wants fast execution and also wants to avoid requotes, can look for brokers offering variable spreads.

[wp_quiz id=”54986″]
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Forex Assets

Knowing The Fundamentals Of NZD/USD Currency Pair

Introduction

Introduction

Introduction

New Zealand dollar versus the US dollar, in short, is referred to as NZD/USD or NZDUSD. This currency pair is classified as a major currency pair. In NZDUSD, NZD is the base currency, and USD is the quote currency. Trading the NZDUSD is as good as saying, trading the New Zealand dollar, as NZD is the base currency.

Understanding NZD/USD

The value (currency market price) of NZDUSD represents units of USD equivalent to 1 NZD. In layman terms, it is the number of US dollars required to purchase one New Zealand dollar. For example, if the value of NZDUSD is 0.6867, then 0.6867 USD is required to buy one NZD.

NZD/USD Specification

Spread 

The algebraic difference between the bid price and the ask price is called the spread. It depends on the type of execution model provided by the broker.

Spread on ECN: 1

Spread on STP: 1.9

Fees

Similar to spreads, fees also depend on the type of execution model. Usually, there is no fee on the STP model, but there is a small fee on the ECN model. In our analysis, we shall fix the fee to 1 pip.

Slippage

Slippage is the difference between the price asked by the trader for execution and the actual price the trader was executed. Slippage occurs on market orders. It is dependent on the volatility of the market as well as the broker’s execution speed. Slippage has a decent weight on the cost of each trade. More about it shall be discussed in the coming sections.

Trading Range in NZD/USD

The volatility of a currency pair plays a vital role in trading. It is a variable that differs from timeframe to timeframe. Understanding the range (min, avg, max) is essential for a trader, as it is helpful for reducing the cost of each trade.

The volatility gives the measure of how many pips the pair has moved on a particular timeframe. This, in turn, gives the approximate profit or loss on each timeframe. For example, if the volatility of NZDUSD on the 1H timeframe is 10 pips, then one can expect to gain or lose $100 (10 pips x $10 [pip value]) within an hour or two.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

AUD/USD PIP RANGES 

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

NZD/USD Cost as a Percent of the Trading Range

With the volatility values obtained in the above table, the total cost of each trade is calculated on each timeframe. These values are represented in terms of a percentage. And these percentages will determine during what values of volatility it is ideal to trade with low costs.

The total cost is calculated by adding up the spread, slippage, and trading fee. As a default, we shall keep the slippage at 2 and the trading fee for the ECN model at 1.

ECN Model Account

Spread = 1 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 1 + 1 = 4

STP Model Account

Spread = 1.9 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.9 + 0 = 3.9

The Ideal Timeframe to Trade NZD/USD

The very first observation that can be made from the above two tables is that the total costs in both the model types are more or less the same. So trading on any one of the two accounts is a fine choice.

From the minimum, average, and maximum column, it can be ascertained that percentages (costs) are the highest on the minimum column of all the timeframes. In simpler terms, when the volatility of the currency pair is very low, the costs are usually on the higher side. Conversely, when the volatility is high, the costs are pretty low. Hence, it is ideal to trade during those times of the day when the volatility of the pair is at or above average. For example, a day trader can trade the 1H timeframe when the volatility of the currency pair is above 8.8 pips. This will hence assure that the costs are pretty low.

Another way to reduce the costs is by nullifying the slippage. This can be done by placing a limit order instead of executing them by a market order. This shall reduce the total costs by a significant percentage. An example of the same is given below.

Total cost = Slippage + Spread + Trading fee = 0 + 1 + 1 = 2

From the above table with nil slippage, it is evident that the costs have reduced by about 50%. Hence, to sum it up, to optimize the cost, it is ideal to trade when the volatility is above average and also enter & exit trades using limit orders rather than market orders.

Categories
Forex Market

The Basics of Spread & Slippage

Spread
Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a

Spread
Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a

Spread

Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a fee on zero-commission accounts (STP accounts). A spread is simply the price difference between the purchase price and selling price of an asset. The broker always shows two quotes of currency – one at which they sell the underlying asset to you and another at which they buy the underlying asset from you. The spread between these two prices makes the broker’s revenue from the foreign exchange transactions they perform for their clients.

Bid-Ask spread

There are two types of forex rates, the Bid and the Ask.

The price you pay to buy the forex pair is called Ask. It is always slightly higher than the market price.

The price at which you sell the forex pair is called Bid. It is always slightly lower than the market price.

The price that you see on the chart is always a Bid price. The ‘Ask’ price is always higher than the ‘Bid’ price by a few pips. Spread is essentially the difference between these two rates.

Spread = Ask – Bid

For example, when you see EUR/USD rates quoted as 1.1290/1.1291, you buy the pair at the highest Ask price of 1.1291 and sell it lower Bid price of 1.1290. This particular quote shows a spread of 1 pip.

Types of spreads

The kinds of spread depend on the rules of the broker. Spreads can either be fixed or floating.

Fixed spreads remain fixed no matter what the market conditions are at any given point of time. The advantage of this type of spread is that the broker will not be able to widen the spreads during volatility.

Floating, also known as variable spreads, are continually changing. They widen or tighten depending on the supply and demand of currencies and market volatility.

Slippage

Slippage is a phenomenon in the forex market where currency prices change while an order is being placed, thus causing traders to enter or exit trades at prices higher or lower than they desire. Slippage happens because of the imbalance of buyers, sellers, and trade volumes. It also occurs when the market is less active with lower liquidity.

For instance, a trader wants to buy a currency pair at $1.0015 (Current Market Price) with a broker of his choice. Once he submits the buy order, the best-offered price suddenly changes to $1.0020. It is considered as a negative slippage of 5 pips. In the same example, if the best-offered buy price suddenly changes to $1.0005, it is regarded as a positive slippage of 10 pips.

How to avoid slippage?

Slippage cannot be entirely avoided if you trade using market orders, but it can be reduced. One way a trader can minimize slippage is to ensure that their broker has many liquidity providers. Another way is to avoid trading during periods of high volatility as prices move faster and at wider intervals. To check volatility, traders can make use of technical indicators such as Bollinger bands or Average True Range.

The only way to entirely avoid slippage is by using strategies that employ limit orders on entries and exits.