Having a spread that is as low as possible can be hugely beneficial to you in trading. The main point is that finding one of the low spread forex brokers and understanding the answer to the question, when do forex spreads widen? can save you a lot of money.
Here we will address the answer to this question as well as provide some of the best tips on how to keep your spread as low as possible. Let’s get started.
Table of contents
When do forex spreads widen?
There are many reasons why spreads may be higher at some times than others. Here are some of the key reasons why you may see a spread widen on a forex pair you are trading.
Breaking News, Natural Disasters, Economic and Political Events
Important news is likely to widen the spread on a pair in many cases. This is not always because of the news itself but instead, because of the uncertainty it provokes among traders and in the market. Breaking news, data releases of importance, natural disasters, political events such as Brexit, the US Presidential Election, and more, can influence the market.
Any of these events tend to have a volatile impact on the market as trading happens in all directions. It is this volatility that in turn can widen the spread. Many experienced traders aware of these situations may even choose these times to avoid trading and opening new positions.
As a whole, these kinds of events can be challenging moments to navigate the markets and spreads for all traders.
Certain Times of trading
The time of the day is also well known to impact spreads and cause them to widen. As an example, you will be able to see that spreads widen towards the end of the trading week. This coincides with the close of the session on Wall Street and volume trade is generally low at this time. The low volume causes spreads to widen.
Something similar also occurs with the trading period moves from one market to another. For example when Tokyo trading closes, and London trading opens, spreads will be wider at the crossover. These are the time periods used to work on system maintenance, and make other adjustments from the broker and bank side. Therefore, you will see an increased spread until everything is set up.
Low Liquidity Markets
As you can gather from the points mentioned above, it is clear that spreads get wider when trading volumes are low and the market is not active. This means market liquidity is low at these times.
This low liquidity also applies to lesser traded forex pairs like minor and exotic pairs. These will typically have wider spreads almost all of the time than major currency pairs simply due to the levels of market liquidity. Having said that, the forex market is known as the most liquid of financial markets ahead of the stock, and commodities market so you should always be able to find a relatively tight forex spread.
The same logic though can also be applied to stocks, commodities, and other assets. Those traded at higher volumes will generally have tighter spreads.
How Spread widening influences trades
It is true that sometimes traders will not even recognize the impact a spread is having on their trade. In reality though, a widening spread is increasing your trading cost and is actually the main cost you incur on a trade.
There are even cases where a very big move in the spread can trigger a margin call from your broker. It is in your best interest then to always keep a close eye on your spread to get a good understanding of your trading costs.
When do spreads widen: tips
With an understanding of when spreads widen, here are some of the best tips to help you combat this and do your best to optimize your trading environment by keeping costs as low as possible.
Trade during the busiest sessions. These are the most liquid and it is well known that the London and US trading sessions provide for the tightest spreads. With this, you should also try to trade the most liquid forex pairs. This most often means major forex pairs as mentioned for the best spreads.
Exotic currencies also have the lowest trading volume and highest spreads. For that reason, you should make sure you are only trading them if you really want to since they are often from developing countries. You should also be sure to keep up to date with market conditions, news, and events which you can do with the help of an economic calendar, videos, news, and other resources from any top broker.
If you really want to find the best brokers with the lowest spread then you can also check here for our lowest spread forex brokers top ten to help you get started.
When do forex spreads widen: FAQ
What does a large spread indicate?
A large spread can occur for many reasons as we have detailed above. The end result though will ultimately be, higher costs for you, and an increase in revenue from the broker.
About the Author
Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world.
A trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.
He is a keen golfer with a very high handicap so when not helping you find the best broker for your needs, you may find him on the course or just as likely following any number of sports from the comfort of his sofa.