Variable spread account

Before understanding in detail what the variable spread account is, it is advisable to precisely define the concept of spread.

The spread, in the trading field, represents the difference between the purchase price of an asset (called Bid) and the selling price of the same (called Ask).

Here is an example to better understand the spread: let’s assume we are trading on a currency pair, British pound against Japanese yen. The expected exchange rate is 166.97 / 167.03. This means that the differential, or the spread, is 6 Pips. The spread is calculated automatically by the broker within the transaction costs and, essentially, is the broker’s source of income on the operation.

The variable spread account is an account that provides for the presence of a spread with fluctuating values: this depends each time on the sell (ask) and buy (bid) values ​​that are revealed when we carry out trading operations.

The fluctuating nature of the variable spread makes it impossible to know from before what the spread affecting our operation is. As a rule, the variable spread is usually lower than the fixed spread, but – precisely due to its random nature – it can also undergo strong and sudden increases.

For those who want to open a trading account, the choice is therefore distinguished between variable spread account and fixed spread account.

The first, the variable spread account, as already mentioned, provides for a floating variance, which changes according to the asset considered and the market conditions that occur before the trading action.

In the fixed spread account, on the other hand, the difference between Bid and Ask is always constant, and is established by the broker at the beginning of the relationship.

Is it better to choose a variable spread or a fixed spread account?

There is no better choice than others. As we have seen, the fixed spread is usually slightly higher than the average of the variable spreads, but these – on the other hand – can also be affected by sudden increases.

In general, the variable spread is therefore advisable for those who decide to operate on markets that are not too volatile, because where the uncertainty of the assets is high, the variable spread usually settles on higher variance.

In any case, the variable spread account is recommended for experienced traders who operate in a very liquid market, preferring less volatile assets and above all opening very short positions.

The risks of a variable spread account are closely linked to the volatility of the securities: if we decide to adopt this strategy for investments over a long period we must be aware how external news or liquidity can lead the market to face big changes, with a excessive rise in the spread. Situation that could force us to pay high trading fees.