Avoid Excessive Spreads: FX Risks & Solutions

In FX trading, the movement of spreads is a very important factor. Sudden spread fluctuations, especially widening too much, can significantly impact by increasing transaction costs and reducing profits. Therefore, this blog will explain in detail important points about spread widening, from basic knowledge of spreads to the times when they widen too much and how to handle them. By understanding the risks of spread widening and taking countermeasures, you can achieve safer and more efficient FX trading.

1. Basic Knowledge of Excessively Wide Spreads! An Explanation Easy for Beginners

The width of the spread strongly depends on market liquidity. In highly liquid markets, the spread narrows, enabling efficient trading. However, when the spread becomes excessively wide, various problems can arise.

Basic Spread

The width of the spread strongly depends on market liquidity. In highly liquid markets, the spread narrows, enabling efficient trading. However, when the spread becomes excessively wide, various problems can arise.

• Increased transaction costs: When the spread widens, the cost per trade rises directly.
• Reduced profits: For day traders and scalpers, spread expansion particularly squeezes profits and increases the risk of eventual losses.

What Does an Excessively Wide Spread Mean?

An ‘excessively wide spread’ refers to a phenomenon where a spread that should normally be kept narrow expands abnormally for some reason. This phenomenon can be caused by various factors, but the main ones are as follows.

• When market liquidity is declining
• Before and after major economic indicator releases
• Sudden news or events occurring

When a major economic indicator is released, the spread tends to widen temporarily. In such situations, it is wise for investors to refrain from trading to avoid risk.

The Importance of Spread Management

To prevent an excessively wide spread before it occurs, it is essential to keep the following points in mind.

1. Pay attention to trading hours: Choose periods of high liquidity, especially when European and New York markets are open.
2. Check the economic indicator release schedule: On days when economic data is released, the risk of spread widening increases, so it is important to know the schedule in advance.
3. Compare and evaluate FX broker spreads: Regularly compare spreads from different FX brokers and choose the one with lower costs, which is key to improving your investment strategy.

By having basic knowledge about spreads, investors can make wiser trading decisions.

2. Time periods when spreads widen and points to watch carefully

In FX trading, it is extremely important to identify the times when spreads open too wide. In particular, during market openings and closings, or when important economic indicators are released, spreads tend to widen. Therefore, extra caution is needed at these times.

Characteristics of market opening and closing

• Opening and closing
  Just before major markets in Asia, Europe, and America open, or immediately after they close, there is a surge in trading demand. In this situation, liquidity temporarily drops, and spreads frequently widen excessively.
• Liquidity fluctuations
  In periods when the market is active, liquidity improves, so spreads usually narrow. Conversely, during low-volume times such as early morning, liquidity decreases and spreads are more likely to widen.

During economic indicator releases

When major economic indicators are released, many traders hold off on positions, reducing overall trading volume. As a result, the risk of spreads widening increases. In particular, extra caution is needed when the following indicators are released.

1. Employment statistics
2. Announcements on monetary policy
3. GDP release

These indicators have a significant impact on the market, so it is important to check their release schedules in advance.

Impact of sudden news

When news about natural disasters, political unrest, or sudden incidents is reported, spreads can widen. Such news introduces uncertainty into the market, causing many traders to adopt a waiting stance, which reduces liquidity and widens spreads.

Monitoring spreads

To accurately identify the times when spreads widen, it is helpful to use the following methods.

• Using an economic calendar
  By checking the schedule of important economic indicators and events, you can avoid times when spreads are likely to open while conducting efficient trades.
• Real-time spread checks
  Using real-time information provided by exchanges or platforms to keep track of spread movements is key to success.

By understanding these key points and skillfully managing trade timing, you can increase your success rate in FX trading.

3. Prevent Losses! How to Handle Excessively Wide Spreads

In FX trading, an excessively wide spread is a highly risky situation. In such cases, avoiding losses requires prior preparation and careful attention to market movements. Below, we introduce specific measures to take when spreads become too large.

Monitor Spread Movements

To grasp spread fluctuations in real time, using specialized tools is the first step in avoiding losses. By utilizing real-time data provided by many FX brokers, consider the following measures.

• Use Tools: Develop a habit of regularly checking spread conditions using trading platforms or dedicated apps.
• Set Alerts: Use a feature that notifies you when a specific spread width is exceeded to help prevent unnecessary trades.

Determine Trading Timing

Avoiding times when spreads tend to widen is very important. In particular, the following time periods require special attention.

• Before and after economic releases: Liquidity tends to decline and spreads widen following important economic data releases. Therefore, it is wise to refrain from trading for one hour before and after the release.
• Market opening and closing times: Spreads often widen excessively during major market open or close times, so try to avoid trading during those periods.

Best Trading Strategies

The following trading strategies aim to minimize the impact of spreads.

1. Set Position Size: Be aware of the risk of widening spreads, set a small position size, and diversify risk.
2. Careful Entry and Exit: Enter during stable market periods and aim to exit when spreads narrow, which is effective.
3. Fast Order Execution: Sharpen your skill to trade quickly before spreads widen, reducing the risk of missing opportunities.

Strengthen Risk Management

If you feel spreads are unjustifiably widening, it is important to enforce risk management. Specific measures include:

• Set Stop-Loss Levels: Adjust stop-loss levels as needed based on spread fluctuations.
• Strict Capital Management: Aim for prudent capital allocation and establish a system to prepare for unintended losses.

By taking preemptive measures against excessively wide spreads, you can prevent potential losses and conduct safer, more stable FX trading.

4. Risks of Excessive Spread Opening and Its Impact on the Market

In FX trading, an excessively wide spread can become a significant risk for traders. This phenomenon can have a substantial impact on trading results. This section provides a detailed explanation of the dangers of spread widening and its impact on the market.

Risks of Excessive Spread Opening

1. Increased transaction costs
   When the spread widens, the price difference between buying and selling increases. This raises the cost of initiating a trade and can erode traders’ profits.
2. Increased risk of stop‑loss
   When the spread widens, the risk of incurring losses beyond the trader’s stop‑loss level increases. This can trigger automatic stop‑losses and cause deviation from the intended trading strategy.
3. Reduced liquidity
   A widening spread often indicates deteriorating market liquidity. When liquidity is lacking, actual trades do not proceed smoothly, and proper order execution becomes difficult.

Impact on the Market

• Increased market instability
  Excessive spread opening signals market instability. Especially during important economic indicator releases or political events, many traders become wary, making spreads more likely to widen.
• Impact on investor sentiment
  When spreads widen, it negatively affects investor psychology. Concern over wide spreads can cause many traders to hold back, potentially reducing overall market activity. Such a situation can lower investors’ willingness to trade and further deteriorate liquidity.

Key Points to Summarize

• The risk of excessive spread opening is a critical factor that involves increased transaction costs and higher stop‑loss risk.
• Reduced liquidity can negatively affect trade execution.
• It can severely impact market instability and investor sentiment.

Constantly monitoring spread fluctuations and especially understanding high‑risk times and situations is essential for proper risk management. Stable capital management and carefully building trading strategies to avoid the danger of excessive spread opening are required.

5. Tips for Choosing an FX Broker: Key Points for Comparing Spreads

There are generally two types of spreads: “principle fixed spread” and “variable spread.”
– Principle Fixed Spread: Usually offered at a fixed width, but can widen under certain conditions. For example, when trading concentrates around the release of economic indicators, the spread may open unexpectedly.
– Variable Spread: Always fluctuates according to market liquidity. Therefore, the spread presented at the time of trade can change significantly, so caution is needed.

Understanding the Types of Spreads

Consider Trading Hours

Spreads are also affected by the time of day. The following time periods are particularly important:
1. During the release of major economic indicators: Trading concentrates before and after the release, making spreads more likely to widen.
2. Market open or close: When new trades start or the market closes, liquidity drops, causing spreads to open.

Pay Attention to Each Company’s Spread Quote Rate

The spread quote rate published by FX brokers indicates how stable the spread is over time. Brokers with a high figure are reliable and usually provide smooth trading. Specifically, choosing companies with a spread retention rate above 95% is advisable.

Confirming the Delivery Stop Time

Each FX broker publishes a “delivery stop time.” During this period, spreads are not provided, so trading may not be possible. Brokers with long delivery stop times should be avoided.

Consider the Overall Trading Conditions

In addition to spreads, it is important to consider the following factors:
– Execution Strength: Whether orders are executed quickly and reliably. This can affect the actual trading cost.
– Ease of Use of Trading Tools: Whether the platform offers robust analysis and order functions is also important. Choosing an easy-to-use platform is key to success for both beginners and advanced traders.

Since spreads are the de facto fees in FX trading, they should be chosen carefully. By comparing spreads, you can make a better broker selection.

Summary

In FX trading, the spread is an important factor that directly affects transaction costs. If the spread widens excessively, it can lead to serious problems for traders, such as increased transaction costs and higher risk of loss. It can also exacerbate market instability and negatively affect investor sentiment. When choosing an FX broker, it is important to consider not only the spread but also factors such as execution strength and ease of use of tools. By acquiring knowledge about spreads and implementing appropriate risk management, you can conduct more stable FX trading.

Frequently Asked Questions

What is a spread?

A spread refers to the difference between the selling price (Bid) and the buying price (Ask). In FX trading, the spread constitutes part of the transaction cost, making it a very important factor.

What risks arise if the spread widens too much?

If the spread expands excessively, transaction costs increase, potentially squeezing traders’ profits. Additionally, the risk of stop‑losses may rise, and market liquidity can deteriorate, leading to various problems.

When are the times when spreads tend to widen?

Times such as the opening or closing of major markets, and around the release of important economic indicators, are when spreads tend to widen. Therefore, trading during these periods should be approached cautiously.

When choosing an FX broker, what points should you focus on regarding spreads?

When selecting an FX broker, it is important to pay attention to the differences between fixed and variable spreads, how spreads fluctuate during different trading hours, each company’s spread quote rates, and the times when services are suspended.

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