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  • What Are Tight Forex Spreads

    Also referred to as narrow spreads, tight spreads occur when the price at which you can buy and sell a market has a very small numerical value. Tight spreads simply mean therefore, that a trader’s cost of trading a market is relatively low and, whilst this saved value may not amount to much in a single trade, over the course of your trading career, tight spreads will stand for a lot in the way of profits margins.

    Similarly, tight spreads may have more of an importance to short-term traders rather than longer-term traders. This is because the value of each trade made by a short-term trader is significantly less than a longer-term trader, so without competitively-priced trading costs, short-term traders could find their efforts going unrewarded by profits. Similarly, tight spreads are not the only costs associated with trading on the Foreign Exchange.

    Forex brokers tend to offer three different commission structures; fixed spreads, variable spreads and a commission based on a percentage of the spread. Fixed spreads simply mean that, regardless of the direction of the market in question, the spreads on offer will always be the same as your initial agreement. These spreads are likely to be higher than variable spreads, but offer a sense of predictability which can be useful when the pace of the markets picks up. Variable spreads on the other hand, can shift and change as the broker sees fit, granting traders the opportunity to maximise profits by taking advantage of spreads that drop to even 0 points, but require some user proactivity in the frequency with which you shop around. Finally, a percentage commission can be taken by your broker in the form of a small fraction of a pip before your order flow is then passed on to a larger market maker. Commissions can therefore provide spreads similarly priced to those otherwise only available to larger traders.

    Whichever spread offering your decide on, it’s always worth first familiarising yourself with the broker’s reliable reputation. After all, a tight spread is only as good as the respective broker’s word.

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