Worried about Scenario: What makes spread go crazy at night. It was 4-5 pips normally. But around 10 PM it peaks at 12pips. What makes spread go crazy?
Ever observed this sudden peak in the spread during trading? If so, you might wonder to know the reasons.
To be a successful trader it’s vital to minimize the effects of widening spread.
This post will cover all possible reasons: why does the spread widen at 10 PM?
Low liquidity is the main factor responsible for spread widening. This in turn increases volatility in the market and makes it unpredictable for small institutions to take part. Forex is a non-centralized financial institution. To bring the market to its normal position after the closing of business day, the spread has to be widened.
During this hour of spread increase, banks recover enough transactions or credit to hand over small institutions to start trading again.
With one hour or 2, the spread will retain its normal position
Why Do Spread Widen in Forex
There are certain times in the forex market when spread peaks. These are the time of some financial news breakout, low liquidity, and high volatility.
Spread is actually the amount that traders pay to brokers for each trade.
When executed orders reduce dramatically, spread changes. If the spread is fixed you can still earn. But your broker may not earn more.
So, reduce your trading cost and go with fixed spread brokers. The forex market is a highly fluctuating entity that changes every moment. So, it’s impossible to have the same value of spread every time.
Spread changes are natural, occasional, and sometimes artificially created by brokers.
Why Does Spread Widen At 10 PM: 5 Reasons
There are several reasons for spread widening at 10 PM.
The most common reason is low liquidity that determines spread. Moreover, the decentralized nature of the forex market is another common reason.
Let’s read more reasons in detail:
Closing Time of Market
Spread widens at 10 PM as its closing time of most of the markets.
For example, the NY market closes at 5 PM or 22GMT. During this time all ECN and liquidity providers tend to stop operation. They would restart after 5:30.
That’s why spread increases. This widening of spread starts around 4;30 and goes till 5;30.
It is the time when liquidity providers are busy unloading inventories to close the business day. To stop the market activity of small institutions, they tend to increase the spread.
Brokers Can Also Widen Spread
Your broker may also be the culprit of manipulating spread. If you are working with variable spread brokers, there are more chances that your broker is responsible for spread widening at 10 PM.
There are many scam brokers who create artificial spikes in price when prices from central banks move. They want to charge a high commission during these hours.
The solution to this problem is to always open accounts of fixed spread brokers. It’s true that prices change near closing time but brokers execute a bit more increased prices on their websites to cheat clients. So, beware of such scams.
Liquidity Is Low At 10:PM
Liquidity is the main factor that moves the spread. When liquidity is higher there are more transactions and active major participants in the market.
But when liquidity lowers, the banks may have low credit to shit to a smaller institution for trading. As liquidity deteriorates at 10 PM the prices move unexpectedly.
When prices move, spreads widen automatically at 10: Pm. When NY closing time approaches the market suffers from low liquidity. The spread remains wider until Tokyo opens.
Forex Is Not Centralized
As we know forex is a non-centralized market. Around 10:PM it’s time to shift trading or transactions from one bank to another.
London handover its transactions to New York, While New York overlaps within the Sydney market and Sydney Market finally handovers to the Tokyo market.
When centers hand over the transaction, they don’t want to keep the same position as previous. It’s the time when London may want more Euros, NY wants to shift to Yen, and so on.
To configure the system during initial handover easily, the banks widen the spread. After recovering the system, the spread gradually goes back to normal.
Financial News Time
When spread gains a sudden spike, it can be the result of some important economic news. It can also increase when there is some news about the interest rate.
At the time of financial payrolls, spread also show marked changes. But it’s rare to have this news around 10: PM. This reason might not be a very common reason for a peak at 10: PM.
What Is Good Spread in Forex
When the spread is low your broker will charge you less. So, a higher spread is not a good option. For all major currency pairs, the good spread is 0.1-1pips. For cross currency pairs the right spread is 1-3 pips. For commodities, 1-3pips is considered the right spread.
Every broker charge spread differently. There are two types of brokers, one who charge fixed spread and the others who charge a variable spread.
When spread peaks, it’s a favorite time for brokers to make money. It’s always good to choose a broker with a fixed spread.
Why does the spread widen at night?
Nighttime is actually the closing time of the market in different locations. When the market shifts from one location to another, the spread gets wider unexpectedly.
This is also the result of low liquidity and high volatility from 23.00 PM to 2.00
Why does forex spread change?
Spread is actually the difference between the bid and asks prices. When it gets wider, the difference between the price is greater.
This happens when the market is showing low liquidity and high volatility. When the market returns to its normal conditions, the spread gets too normal.
Why does forex spread so High right now?
High spread means the major banks have low credit to give to smaller institutions operating in forex. This lowers the number of active players in the market.
Hence low liquidity and high volatility are observed. Ultimately this makes spread higher than normal.
To summarize, spread widening is an essential step to recover the market from its previous conditions.
It is impossible to stay irrelevant of the spread effect in your trade. Many traders fail in forex because they fail to understand how spread can affect their trades.
In order to minimize the effect of widening spread, trade liquid currency pairs. This is the best way to participate in the market during the liquid trading session.
So, plan your trade and use stop losses after keeping the spread change factor in your mind.