The question of which is a better option between fixed and variable spreads depends on the need of the trader.There are traders who may find fixed spreads better than using variable spread brokers. The reverse may also be true for other traders.
Generally speaking, traders with smaller accounts and who trade less frequently will benefit from fixed spread pricing.
And traders with larger accounts who trade frequently during peak market hours (when spreads are the tightest) will benefit from variable spreads.
Traders who want fast trade execution and need to avoid requotes will want to trade with variable spreads.
Spread Costs and Calculations
Now that you know what a spread is, and the two different types of spreads, you need to know one more thing…
How the spread relates to actual transaction costs.
It’s pretty easy to calculate and all you need are two things:
- The value per pip
- The number of lots you’re trading
Let’s look at an example…
In the quote above, you can buy EURUSD at 1.35640 and sell EURUSD at 1.35626.
This means if you were to buy EURUSD and then immediately close it, it would result in a loss of 1.4 pips.
To figure out the total cost, you would multiply the cost per pip by the number of lots you’re trading.
So if you’re trading mini lots (10,000 units), the value per pip is $1, so your transaction cost would be $1.40 to open this trade.
The pip cost is linear. This means that you will need to multiply the cost per pip by the number of lots you are trading.
If you increase your position size, your transaction cost, which is reflected in the spread, will rise as well.
For example, if the spread is 1.4 pips and you’re trading 5 mini lots, then your transaction cost is $7.00.
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