This article is about the importance of spreads in the forex Australia market and how to trade within the spread.
There have been many changes to the forex Australia market over the last few years. The volume in the market has increased to more than five trillion US dollars. Technology has made the execution of trades extremely fast.
Many traders have always experienced problems with making a profit due to the spread which is the difference between the ask and bid prices. Due to all the changes in the market, the spread has shrunk considerably. This has made the cost of this business better for most traders.
Forex Australia Cost of Business
Traders will tell you that the spreads and commissions are the main costs of doing business in this market. In the forex Australia market, spreads are normally charged as opposed to commissions. In the past, the difference in prices was quite wide. At the time, most forex brokers stated that it was the most competitive you would receive. This meant that retail traders were paying a rather large cost when entering one position.
The spread has narrowed considerably over the last few years. The growth and popularity of the trading market has contributed to the liquidity. The increased level of activity has prompted forex brokers to offer better spreads. This means that the price of entering a trade has decreased considerably.
Banking institutions have implemented new systems whereby broker orders are aggregated. This has prompted forex brokers to offer their clients prices very close to that being offered in the interbank market. Many traders prefer working on variable spreads compared to fixed spreads and there are several reasons for this.
Pros of Variable Spreads
- You are able to obtain better pricing. Forex quotes are a reflection of the interbank rates.
- The spreads have become narrower. Many brokers that offer variable spreads may offer you spreads as low as one to two pips on major currency pair trades.
- Variable spreads offer traders a view of the forex market conditions. In the event that spreads are narrow, it implies that there is a high amount of liquidity. When spreads widen, it implies that liquidity for the currency pair may not be as good.
Cons of Variable Spreads
- Variable spreads causes a variable cost of entry. Retail traders are often quoted two pips from one broker, whilst others quote 5 pips for the same currency pair.
- Certain strategies may be affected negatively as limit and stop orders are subject to fixed spreads as far as charts go.
In the past, forex brokers did not allow traders to trade within the spread. This is not a problem for long-term traders, however short-term traders and scalpers can benefit. Scalpers were generally not happy to enter the forex market because some forex brokers placed a restriction of the points at which certain orders could be placed. For example, a short-term trader may want to implement a sell limit about four pips from a buy entry, the forex broker would reject the order as a five to six pip different was necessary.
Forex Australia spreads are important to anyone in this market. It could mean the difference between a profit and a loss.