Factors That Influence The Spread In Forex Trading
Various factors make up Forex spreads and they are variable. The factors include market liquidity, market conditions, upcoming economic data and investor sentiment. At times of significant market reports, e.g. reports on economic growth, inflationary reports or interest rate changes, the spread by and large widens. In other words, each time there is an unevenness of buyers and sellers for a particular currency pair, the spread will broaden to show this market condition.
A trader would as you would expect want to reduce the cost of his transaction, thus, a trader can do this by adhering to these few rules:
- Stay away from trading exotic currency pairs. You would be better off staying with the majors. Each and every major have extremely tight spreads as brokers and market makers vie against each other to add to their market share. This is advantageous for traders as they will pay lesser transaction costs with tighter spreads. But then again, currency pairs those are less popular and with lesser competition as well as liquidity will have considerably higher spreads.
- Let the most active hours on the Forex market be the only time you trade. As market participants’ number increases, spreads as a rule narrow as there are loads of buyers and sellers for any given price of a currency pair. The overlap of the London and New York sessions, which is between 12:00 PM and 4:00 PM GMT, is the most active part of the day on the Forex market. This is also the point in time when the biggest price fluctuations go on.
- Steer clear of trading during major news releases. There is a lot of excitement in the Forex market and there is a major news release for no less than one of the eight major currencies virtually on a daily basis. Traders and large investors have a habit of staying away from the market while waiting for the release to be published, as this is more often than not accompanied with huge price movements and unevenness between buyers and sellers, which broaden the spread.
- Gaps and wide spreads time and again come together. Once there is a major market event over the weekend, the price will have a tendency to open with a gap lower or higher than the market closed on the preceding Friday. As soon as such a gap forms with the opening of the Sydney session, spreads are habitually very wide, and can attain dozens of pips even on foremost currency pairs like EUR/USD. The spread as well narrows after the session and trading week gain impetus. And so you should keep away from trading just after a gap forms if transaction costs are extremely vital to your trading strategy.
Now you know why taking care with transaction costs on the Forex market is an imperative milestone to becoming a lucrative trader. Understanding the best time to trade the market, and how to steer clear of very high spreads can make a momentous difference in the end result for all traders. This is above all true for day traders or scalpers who have a habit of opening lots of trades in a short period of time, where transaction costs acquired by spreads can represent a large piece of their profit. The most imperative note to bear in mind is that during increased market improbability and major news releases, spreads can rise steeply even on major currency pairs. Oppositely, trading foreign currency pairs will constantly incur bigger transaction costs against the majors, and you should shun these pairs in total except you have a specific, profitable trading strategy for trading the minors.