When you trade forex Australia you will notice that you have to consider the spreads that brokers offer. It is important that you understand why brokers charge spreads and what affects the forex Australia spreads you are getting. When you understand the spreads you can better determine how they are going to affect your trading.
The Cost of Doing Business
Retail spreads are linked to the cost of business that the forex brokers have to pay. When the costs are low the spreads will be tighter because the broker does not have to add too much to make a profit. Forex brokers have to pay fees for every transaction completed in the market, but there are factors which have caused these fees to lessen. The increased number of traders on the market has caused the liquidity of the market to jump. This means that there are also more brokers on the market which causes the banks and financial institutes to compete and offer better rates to the broker. By the broker getting better prices they are able to offer better spreads to their customers.
Forex Australia Variable Spreads
A lot of forex brokers employ variable spreads which fluctuate with the foreign exchange rates and market conditions. These spreads generally bring the price of trading closer to that offered on the interbank market. There are a few benefits and drawbacks to these spreads that you should know about.
The pricing offered by retail brokers with these spreads is closer to the interbank market which makes retail trading more profitable. The spreads per transaction could be as low as 1.5 to 2 pips on the major pairs. When trading an exotic pair the spreads will still be wider. The use of variable spreads also offers traders some insight into the market conditions. If the spreads are narrow then the market is good, but if the spreads are wide than the market is not good.
The fluctuations in price can cause varying entry prices. This means that you could enter a similar trade on separate days and pay 2 pips for one spread and 5 pips for the next spread. Certain strategies cannot be used with variable spreads as the stop and limit orders are subject to the prices and spreads. These strategies need to be executed with a broker that offers fixed spreads.
How to Trade Within the Spread
Trading within the spread is something that a few brokers allow, but this is not widely down. Trading within the spread is ideal for scalpers and short-term traders. These short-term traders often want to place a sell limit only 5 pips away from their entry point. In the past this would be rejected as the broker would want the order to be placed further away. However, with the tighter spreads being offered brokers are more willing to allow this.
The benefits of this trading come to bother the broker and the trader. The broker has an increased liquidity when these traders are completed. The trader has a new avenue to explore in order to make profits on the market.