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"Typical spreads" vs "Average spreads" - the difference and why you should care.

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Old 08-12-2009, 11:26
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Default "Typical spreads" vs "Average spreads" - the difference and why you should care.

I wanted to talk about something which every trader looks at when ascertaining which broker to start trading with – the spread.

As you all know, there’s been a lot of advertising concerning spreads with “as low as” pricing. Whilst these might be surprisingly low, ask yourself, will you ever trade with “as low as” pricing? Because of course, “as low as” spreads are virtually irrelevant if you can’t even get in or out of a trade at those levels.

Also, many brokers are promoting “typical” spreads – but the definition of typical is rather vague... What traders need to know is: what are the average spreads that a broker is allowing us traders to execute orders at – and what percentage of trades actually get executed.

Great average spreads coupled with stellar execution is what really matters.

You see, this is the issue… It is beginning to bother me when I see “as low as” pricing. I noticed that Interbank FX is promoting average prices – which I haven’t seen before. I’ve seen typical (with very loose definitions) and “as low as” – but how often do you get that?

I’m raising this issue. I think brokers need to be more transparent – like Interbank FX and show us what’s under the hood.

Now, I’m not going to name and shame any brokers, but suffice it to say you can easily check for yourself. A large portion of brokers will just tempt potential clients by effectively saying, "this is how cheap you can trade with us for". So they might claim for example, that the GBP/USD can be traded with a spread as low as 1 pip. Technically, it might be possible, but really, you might just see that 1 pip spread on GBP/USD for perhaps, a couple of seconds in a 24 hour period. As you can see, this is barely tradable, so what benefit is it to the end user?

A better alternative to the end user is the average spread. This is much fairer, since it takes into consideration every pip fluctuation throughout the trading day.

Some brokers will even go as far as saying, "Fixed spreads at all times". Whilst these brokers may indeed have fixed spreads, it's not an accurate reflection of reality; far from it. As we know, forex spreads are always varying, liquidity varies, the number of buyers and sellers vary, volume varies, so many factors involved keep changing the spreads, so how can a broker make these and even deliver these outrageous claims? Purely for one reason, they make money when you lose. It's all down to "playing the percentages". These brokers know that many new traders will fall for the fixed spreads hype, this entices them, and consequently what happens is that new traders who do not understand the importance of a decent forex education will fail, resulting in profit for the broker.

Now, I’m not working for Interbank FX; it’s just that, as of right now, they are they only broker that displays a true “average spread”. If anyone knows of any other brokers who are displaying similar accuracy, I’d love to hear it. Of course there will be times when spreads are higher than normal, of course there will be times when it's hard to enter or exit a trade, no broker can promise amazing spreads and amazing execution at all times, that's simply impossible, and anyone who does - one can assume they're not telling the truth.

You can check out IBFX’s new spreads structure at:

http://www.ibfx.com/NewVisitor/Performance
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