It is very important to understand how spreads are priced and work when it comes to trading in Forex, both for newbies and old-timers. The spread is simply the difference between the buying price and selling price of a currency pair. Spread is one of the principal sources of money generation by Forex brokers. A good Forex broker in the Netherlands is the one who works on the transparent and competitive spreads that dictate how much the trading will cost him while adding value to his overall profit.
The spread may differ from one Forex broker to another, depending on the currency pair being traded. Most of the brokers provide two types of spreads: fixed and variable. A fixed spread is not changed by the market conditions and gives predictable costs to the traders. On the other hand, a variable spread may change because of the condition of the market, like volatility and liquidity. The variable spreads are narrow during low volatility but can be wider at periods of high volatility, thereby raising the trading cost. For a Forex broker in Netherlands, offering both types of spreads lets the traders choose the best version suitable for their trading style and needs.
The most important factor, however, when choosing Forex brokers is the size of the spread. A smaller spread is preferred because it decreases the cost to enter and exit trades. For example, when working with a currency pair which has 1-pip spread for the trader, this would imply that the price of the currency pair will need to rise at least in one pip in the trader’s preferred direction before starting earning a profit. With the wider spread, however, it only means that the price should move further in the trader’s favor before this can break even and thus lessen their overall profitability.
For Dutch traders, of course, knowledge of a spread structure is very necessary because it is not constant from one broker to the other. There are many brokers that sell what they call “zero spreads” or “commission-free.” These guys put an ad saying that the spread starts at 0 pips, but on every deal, they collect money for it as a commission. This means the cost per trade would be lesser when contrasted to the same thing trading with a larger spread to huge traders in terms of volumes. Therefore, it is in their interest for the traders to determine their total trading costs with considerations of the two mentioned items: spread and commission charges.
Besides the spread type, the liquidity of the Forex market considerably determines the spread. This is the largest and most liquid financial market in the world, but not all currency pairs are equally liquid. Thus, major currency pairs like EUR/USD have relatively tighter spreads due to their high trading volumes and the strong interest of people in the market. More or less exotic pairs may enjoy higher spreads with fewer trades and lower volume because of low liquidity. The selling point for an average Forex broker in Netherlands remains offering tight spreads on high turnover popular currency pairs, which facilitate their ability to trade more inexpensively.
Therefore, if one aims to minimize cost in the intention of trading, then he should look for the right Forex broker. A Forex broker, first and foremost, should be competitive in its spreads besides order execution and proper customer service. Any trader should monitor the general condition of the markets, of course, knowing that within some volatile market periods the spreads can widen – once it happens with economic releases or major political news. Knowing how spreads work and how they can affect decision-making while trading is crucial to becoming a more knowledgeable and successful Forex trader in the Netherlands.
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