Spreads often widen during the closing hours of a trading session due to decreased market liquidity, lower trading volume, and reduced activity from major market participants. This widening can increase trading costs and affect profitability, particularly for short-term traders. Managing this phenomenon requires strategic adjustments and careful risk management.

Why do spreads widen during session close?

1. Decreased liquidity: As major market participants, such as banks and institutional traders, reduce activity near session close, fewer counterparties are available to match trades.
2. Lower trading volume: Reduced trading volume limits the supply and demand balance, causing brokers to widen spreads to account for risk.
3. Market maker adjustments: Brokers and liquidity providers widen spreads to manage risk associated with reduced order flow and heightened uncertainty.
4. Upcoming session transitions: Anticipation of volatility during the transition to the next trading session or news events can lead to preemptive spread widening.

How to manage widened spreads during session close

1. Avoid trading near session close

• Refrain from entering new trades in the final hours of a session, particularly during periods of reduced liquidity.
• Focus on trading during high-volume periods, such as session overlaps or major news events, when spreads are tighter.

2. Use limit orders instead of market orders

• Limit orders allow you to specify your desired entry or exit price, avoiding unexpected costs due to widened spreads.
• Market orders, in contrast, may execute at less favorable prices during periods of spread widening.

3. Monitor spread behavior

• Track typical spread patterns for your preferred currency pairs and identify when spreads are most likely to widen.
• Use broker tools or platforms that display real-time spread data to stay informed.

4. Adjust trading strategies

• Scalping and short-term strategies can be less effective during widened spreads as the cost of trading increases.
• Consider using swing trading or longer-term strategies where minor spread fluctuations have less impact on profitability.

5. Choose brokers with competitive spreads

• Opt for brokers known for maintaining relatively tight spreads, even during low-liquidity periods.
• Consider ECN (Electronic Communication Network) brokers, which often offer tighter spreads due to direct market access.

6. Plan trades with spread widening in mind

• Set stop-loss and take-profit levels accounting for potential spread changes to avoid premature exits.
• Use wider stop-loss levels during session close to accommodate increased market noise caused by wider spreads.

7. Trade high-liquidity pairs

• Stick to major currency pairs like EUR/USD, GBP/USD, and USD/JPY during session close, as they tend to have smaller spread fluctuations than exotic or less liquid pairs.

8. Manage leverage cautiously

• High leverage amplifies the impact of widened spreads on your account balance. Use moderate leverage during low-liquidity periods.

9. Monitor news and events

• Anticipate spread widening before scheduled events or session transitions, particularly if significant announcements are expected.

10. Avoid holding positions with tight margins

• Positions with tight stop-loss levels may close prematurely due to spread widening. Reassess risk parameters when trading near session close.

FAQs

Why do spreads widen during session close?
Spreads widen due to reduced liquidity, lower trading volume, and increased risk for brokers as major market participants reduce activity.

Which currency pairs are most affected by widened spreads?
Exotic and less liquid pairs experience the most pronounced spread widening, while major pairs like EUR/USD and USD/JPY are less affected.

How can limit orders help with spread widening?
Limit orders ensure that trades execute at a specified price or better, avoiding unexpected costs from widened spreads.

Should I trade during session close?
It’s generally advisable to avoid trading during session close unless your strategy accounts for wider spreads and lower liquidity.

Do all brokers widen spreads during session close?
Most brokers widen spreads during session close, but the extent varies. ECN brokers typically offer tighter spreads compared to market makers.

How can I protect existing positions from spread widening?
Set stop-loss levels that account for potential spread changes and avoid overly tight stop-loss placements.

Does spread widening affect all markets equally?
Spread widening is more pronounced in forex and less liquid markets. Major stock indices and commodities are less affected due to centralized exchanges.

What is the best time to trade to avoid widened spreads?
The best time to trade is during high-liquidity periods like session overlaps or major economic data releases.

Can I use trading algorithms to handle widened spreads?
Yes, algorithms can help by adjusting order placement and execution based on real-time spread data.

Are widened spreads predictable?
Yes, spreads typically widen during session closes, around major holidays, or before significant news events.

Conclusion
Managing spread widening during session close involves timing your trades wisely, using limit orders, and trading high-liquidity pairs. By understanding why spreads widen and implementing strategies to mitigate their impact, traders can reduce costs and protect profitability during low-liquidity periods.