Factors That Can Widen Your Bid-Ask Spread When Forex Trading

If you trade Forex, then you already know it’s all about trading the difference in currency strength. That means traders have a lot to watch out for, like macroeconomic trends and monetary policy changes. Less obvious is the bid-ask spread, which can and will widen depending on a variety of factors affecting the market, and is unrelated to the strength of your traded currencies. Here’s how it happens, and how even strong currencies can have wide spreads sometimes.

Liquidity & Market Volatility

Let’s start with a relatively obvious one: liquidity, and the volatility that it can invite. Just like ordinary stocks, Forex pairings can suffer from low liquidity that thins the order books and forces the bid and ask apart. Those extra pips can weaken your entry and sacrifice potential profit, even if your trade idea pans out. As for actual price discovery, a low-liquidity market can see drastic movements when trades do hit the book. Market volatility itself will also widen the spread to avoid slippage.

Traders should pay attention to spreads when considering a position, so they can get the best possible deal on their entry. It also helps if you can use a platform dedicated to low fixed spreads that stay firm even if the markets move, like Trade Nation, which specializes in spread betting, CFDs, and commodities trading.

The Time of the Day

The Forex market only stops on the weekend, and currencies are tied to nations that get up, go to work, announce policy, and clock out at set times during the workday. This leads to repeated and predictable periods where volume is higher, tightening the spread, and moments where volume dries up, and bid-ask gaps widen instead.

One reliable example is the Daily Rollover Period at 5:00 PM EST. To settle a trading day in New York, banks close up shop to revisit and reissue swap rates. This triggers a sharp drop in liquidity for several minutes, causing price spikes on even the strongest currency pairings. Likewise, the market open on Sunday and the market close late Friday both see liquidity fall, usually as financial institutions bow out of positions (sometimes to adjust for re-entry next session). All Forex traders should pay attention to when the market is open, using a Forex Market Time Converter if needed.

Your Broker’s Execution Model

As mentioned, some brokers offer fixed spreads. They can do this because they get protection from short-term spikes from their market maker. The tradeoff is that, under normal conditions, the fixed spread platform will have slightly higher spreads than one without those protections. Platforms with variable spreads reflect the market in real time, which may mean slightly lower spreads during normal trade, but it means a widening spread can sneak up on traders.

Ultimately, most spread changes are caused by identifiable market-wide phenomena that skilled traders can identify and sidestep before they happen. While Black Swan events and geopolitical drama can swerve any currency trade, knowing when and how spreads change can do a lot to protect traders.