All entities involved in providing Forex trading clients access to the market to execute orders have to make money somehow, and in some cases, there can be a conflict of interest. Forex Brokers are the entities that connect you to this market, along with providing leverage and analysis tools. For this privilege, the majority of the Forex brokers will charge their clients either a commission or earn money from the spread. How a broker makes money is important because you need to choose between a variety of different kinds of Forex brokers when you open an account for the first time.
Forex Commissions and Spreads
Either commission and spreads are the costs of doing business in the Forex market. These costs are charged by the brokers per trade where they charge you a fee in return for executing buy or sell orders.
The first, and main source, of income for brokers, is the two-way quotation system. Generally, when you’re looking at a quote and deciding whether to buy or sell a currency you’ll notice that the broker will give you two quotes: the Bid and the Ask price.
The bid price is the price at which you sell, while the ask price is the price at which you buy. The asking price will always be greater than the bid price. The difference between the bid price and the ask price is called the spread.
If the quotes of the spreads are very small, or what is called tight, that means they are very competitive. If the spreads are wide, the broker is trying to make more money from their customers who trade these pairs. It can be that the pairs have very little liquidity or that the broker is trying to make additional profits from their customers who trade these pairs.
In order to make money as a trader, you have first to overcome the spread. Forex brokers generally offer two types of spreads:
- Variable spreads: which is determined by currency pair liquidity and market volatility.
- Fixed spreads: which are pre-agreed in advance by your broker and are not influenced by market conditions. Fixed spreads are usually found for the major pairs with higher liquidity and sometimes limited to certain account types.
To read more about spreads and what the spread tells you, we have an article here.
Generally, commissions in Forex trading are similar to the spread in the sense that they are charged on every order placed. Unlike the Forex spread, commissions aren’t determined by either market volatility or by currency liquidity, but by your broker. Forex brokers generally offer two types of commissions:
- Fixed commissions: The standard pricing structure offered by the majority of Forex Broker is around $3 per each $100k notional value trade. Usually, you’ll have to pay a commission both when you open and close a position, so it’s the full round turn cost that we have to keep in mind.
- Variable commissions: This commission pricing model is determined by your total turnover, in other words, your total volume traded. With the variable commissions, a broker may also charge the volume commission rate based on the account balance and the total volume traded.
The bottom line is that no matter what type of the fee structure you prefer there is one certainty – there is a cost of doing business in the Forex market. Additionally, you have to consider that aside from the transactional costs of trading there might be some extra costs like data feeds fee, overnight rollovers and other hidden fees that some obscure broker might have. Our team at Forex MY has put together a list of what we consider are the best retail Forex Brokers available for you, and a list of Islamic Swap-free accounts available.