Why do spreads widen?

Hi all, just curious about why do spreads widen. I created a trade today and did it as I normally do with a stoploss etc.. The next thing I know the market rallied and took me out. I was a little shocked as the price was not really near my stop loss. When I looked at the spread, it was 12 pips when it is normally 4-5. Can someone please help me with this?

thanks.

Ok, I could be wrong here, but technically spreads widen because of a lack of liquidity. A spread is just the difference between bid and ask, which is the difference between what someone will buy at and what someone will sell at. During high volitile times, this difference becomes larger, hence a widening of spread.

That and it's just a way for the broker to make more commissions.

Twinchell is correct. And further, It is a way for the broker to mitigate their risk when the market is one sided. By Raising the spread, it decreases their exposure to being on the wrong side of your trade. Generally the spread will widen when there is a great uncertainty as to price direction, as when important news comes out. It is also a way of discouraging trading during those times... It is somewhat as though the broker is saying I do not want your trade right now.

With the Market makers, in all types of markets, they generally are required to take trades that the market will not, but they can generally set the price.

Now sure there is a lot of abuse in the Spot FX market, but the principal is the same.

so basically, as a newbie, I should stay away from currencies that have a fundamental day. How long after a fundamental announcement should I wait to get back into the market (how long does it take to stabilize)?

Or get a fixed spread broker. Most do not widen their spreads, except maybe during extremely volitile events, which are only a couple per month.

The other option would be to get a broker that allows you to set your stop trigger to "trade through" rather than 'first touch'. This way, even if the spread widens, that widened spread won't take out your stop unles there is actual trading going on at that level. Quite a useful thing to have. I've come across it only once or twice with brokers I've used/demo'd.

which brokers have this fixed spread? Most of them that I have seen have an asterisk (*) beside their fixed spread statement and when you read what that asterisk means, it says under normal market conditions. what the hell does that mean? lol. Also about that trigger thing, I do not understand what you are saying.

After having read through Post # 7 of this thread I think it is encumbent to say {Sorry guys} Forget all of that.

Forex is a New Market {comparatively speaking} which took it's essence of trading from different markets BUT in Fx, most of us {you} Trade Against your Borker {He takes the Other Side of your Trade} Thus there is an inherent MISCONCEPTN that, When spreads widen, blame your Borker.
WRONG.

I believe that some of the Old Farts around here would comply that, while Trading Commodity Futures over the Phone, That was the first question we would ask. "What's the Spread on... Fall {Autumn to the Brits} [Sep] Beans?"

Think about that.
If I'm a Buyer {BID} and WE have control, I'm certanly NOT going to pay what They are ASKING. So the eventualty may arise that the Highest Bid is 1.2500 while the Lowest ask is 1.2600. WOW !! A 100 pip Spread AND, No Borker Involved! OR {the Creme de la Creme} an inexperienced seller would freshly place a GTC order with his Borker to Sell @ "X" which was Below the Market. Whaaaoooompphhhh. GOT 'IM.

So...
When or why would your Borker widen his Spread?
I can think of only 2{two} reasons.
1) Because that's the way it is !
OR
2) He's a Pip Hunter.

Understand this.
Not all Fx Trdrs have been trading for 5 years or less. Therefore... They UNDERSTAND Trading and realize that you can't keep blaming your Broker.

You wouldn't complain to an Ultimate Fight Ref that... "I didn't know he was going to use his Elbow!" What do you think the Ref would say?

Bottom line........
Caution on Fixed Spread Borkers because it is not the real world.

FF is either an Annomally or a Paradox.
People wanting to take funds from each other while divulging how to do it.
But whatever it is, It's Excellent!

The market will stablize within the hour after a news rush.

Hey! That sounds frustrating, I can see how it’d catch you off guard. Spreads can widen for a few reasons, but one of the main ones is during periods of low liquidity, like right before or after major news releases or during off-hours when fewer market participants are active. In those times, brokers might widen the spread because there’s less market depth, and they need to protect themselves from slippage.
Also, if you're trading around volatile events (e.g., economic announcements), it's pretty common for spreads to spike, sometimes without much warning. If you’re trading during major market opens, spreads can also widen temporarily as the market adjusts to the new trading volume.
If it happens frequently, it might be worth checking with your broker as well, they sometimes have wider spreads depending on your account type or the currency pair you're trading.
Hope that helps!

Still trying to understand spreads properly.. why do they suddenly widen so much sometimes even when the market doesn’t look that volatile on the chart?
I’ve noticed a few times my chart looked relatively calm but the spread suddenly jumped hard for a few seconds and would’ve stopped me out if my Stop Loss was tighter. Is that mostly liquidity provider differences or internal risk management from the broker side?

It's usually a liquidity drop. Which sounds like what you might have experienced, particularly if it was before an event or hitting a key technical level. Even if the chart looks dead calm, if the big banks and liquidity providers pull their orders (common right before news or during the daily rollover), the spread spikes instantly because there are no close buy/sell orders.