Forex Broker selection - that elusive decision… Making money with automated currency trading systems?
Jan 03

…at least so if you know what to do with it.

Recently I was again looking for a Forex broker to handle my currency trading activities. Checking quite a number of Forex trading forums (or is it fori..?) I noticed that when evaluating Forex Brokers, quite a few statements contained negative comments about this or that Forex broker widening up the spreads in certain market conditions. Is this a bad thing, then?

FX Brokers widening up spreads

When are Forex brokers widening up spreads? Spreads are widened up in conditions where a Forex Broker has higher risks to cover. There is a number of causes that increase risk for your FX Broker:

  • Low market liquidity. For this reason, spreads are sometimes widened up outside the normal high liquidity session of a currency pair.
  • Market news that is significant enough to move the markets.
  • Any other situation where liquidity and price action volatility are deemed risky by your broker - risky for his business that is.,,

Gauge your risk

Whether variable Forex spreads is a bad thing or not depends on your trading system and trading style. I for one prefer to trade when I know that financial news like the non-farm payroll or other world news is not influencing price action too much. My take on it is that if my Forex broker thinks he’s encountering increased risks, so am I.

Variable spreads used as an indicator

I use the instantaneous spread my Forex Broker is offering as a technical indicator to gauge potential risks. Currently the lowest spread I get for the EUR/USD pair is 0.9 pips. If I see that my broker increases the spread above 1.2 pips I do not open any new positions. Also, I tighten up stops for any open position I may have at that time.

Be safe, keep monitoring variable spreads

Variable spreads contain information - be safe and use it as an extra information snippet that tells you when to be conservative! As long as the base spread is low, I have nothing against variable spreads. When the spreads widen up, my currency trading broker is sort of telling me to stay on the fence just a bit longer…

But I’m on fixed spreads all the time…

You are? O.k. Even in this case no one is preventing you from opening another account with a broker that uses variable spreads, is there? Put a few dollars into that account to keep it alive and use the varying spreads of that broker to gauge your market risks…

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