Shifting Spreads and Such

Shifting spreads keeping you guessing?

Indian_Chameleon_(Chamaeleo_zeylanicus)_Photograph_By_Shantanu_Kuveskar

Just as a chameleon will change to match a variety of backgrounds, in the currency market spread will invariably change to match market events. Here at the Apiary Fund, the ECN style market structure shows constantly changing spreads throughout the day. Spreads are either set naturally (by pending orders in the market) or, if the market is not liquid, set by the liquidity provider.

Since spreads will widen or shrink often, it is common to see them fluctuate during the open or close of trading sessions. This makes sense because the open and close of each trading session are usually the most volatile. Spreads will also adjust for

-Uncertainty in the direction of prices

-News events

-Volatility shifts

-Changes in liquidity

Liquidity providers use spread to help manage risk by either encouraging or discouraging the trading of the liquidity provider’s currency inventory. For example, if a liquidity provider wants to move inventory, they might narrow the spread to encourage trading; similarly, if they want to retain inventory, they might increase the spread to discourage trading in that currency. The magnitude of the spread indicates the degree to which a liquidity provider wants to encourage or discourage trading. Obviously, during uncertain times of high volatility and news events, it’s common to see spreads widen–sometimes significantly!

While spreads will always vary, by knowing why they’re changing you’re showing that you understand what’s moving the market. If you can understand spread changes, you’re one step closer to really knowing how to trade. You will be acting instead of reacting. Now see if you can predict where the next shift will be!

Happy Trading!

Shawn Lucas

About Shawn Lucas

Shawn Lucas is the founder and fund manager at Apiary Fund. He began his career as a broker for Fidelity and Charles Schwab where he worked the trading desk and processed orders for high net worth investors. An expert in the field of technical and economic analysis of the financial markets, Lucas has since established his reputation as a thought leader and guest speaker for several financial companies including Reuters and TD Ameritrade. He has traveled extensively throughout the world providing lectures, training, consulting, and expert testimony to companies and individuals on the art and science of financial analysis. Lucas has authored sixteen books and studies on the use of technical and economic analysis in stock, option, and futures trading. His simple and methodical approach to the markets has helped thousands of investors better understand and improve their performance and profitability in the financial markets.

Like this Article?

Check out our newsletter for regular forex trading tips and advice!

Or you can visit our website to see what our unique business model is all about ...and how you can participate!

, , ,

Comments are closed.