Get to know High Spreads and Low Spreads Trading
It is important to note that forex spreads can fluctuate throughout the day, ranging between 'high spreads' and 'low spreads'.
This is because spreads can be affected by various factors such as volatility or liquidity. Traders will notice that some currency pairs, such as emerging market currency pairs, have larger spreads than major currency pairs. Traders' major currency pairs are traded in higher volumes compared to emerging market currencies, and higher trading volume tends to result in lower spreads under normal conditions. In addition, it is known that liquidity can dissipate and spreads can widen ahead of major news events and between trading sessions.
High Spreads
A high spread means there is a big difference between the bid and ask prices. Emerging market currency pairs generally have higher spreads than major currency pairs.
A spread that is higher than normal indicates one of two things, high volatility in the market or low liquidity due to trading outside business hours. Before news events, or during big shocks like Brexit and the US Election, spreads can widen considerably.
Low Spreads
Low spreads mean there is a small difference between the bid and ask prices. When the spread is low it is preferable to trade, such as during the main forex sessions. Low spreads generally indicate low volatility and high liquidity.
Monitor Spread Changes
News becomes a scourge that causes market uncertainty. Releases on the economic calendar occur sporadically and depending on whether expectations are met or not, can cause prices to fluctuate rapidly. Just like retail traders, major liquidity providers don't know the outcome of news events before the news is released! As such, they seek to offset some of their risk by widening the spread.
Spreads Can Cause Margin Calls
If a trader currently has a position and the spread widens dramatically, the trader's transaction may be terminated from the trader's position or receive a margin call. The only way to protect the trader himself during times of spread widening is to limit the amount of leverage used in the trader's account. It is also sometimes beneficial to hold the trade during times of widening the spread until the spread narrows again.
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