In the foreign exchange market like in any other type of business, all entities involved to give you access to the FX market to intermediate your orders will have to make money somehow. The Forex Brokers are those entities that give you online access to the market as well as leverage which will permit you to make more money that you couldn’t do otherwise. For this privilege, the majority of the Forex brokers will charge their clients either a commission or the spread. This is important to know 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
Both commissions and spreads are simply associated with the cost of doing business in the Forex market. These costs are charged by the Forex brokers for each order placed. Basically, the Forex broker will charge you a fee in return for executing buy or sell orders.
The first main source of income for most brokers and the way they make their money is through the two-way quotation system. Generally, when you’re looking at a quote and deciding whether to buy or sell a particular 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 and this difference is how some Forex brokers make their money.
A broker will always give you a two-way quote anytime you’re interested in dealing in a particular currency. If the quotes of the spreads are tight that means they are very competitive and if the spreads are wide that means the Forex broker is trying to make more money off of their customers so obviously their prices would be worse than what you would expect to get in the real Interbank market.
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.
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 nor by currency liquidity, but by your Forex 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 the best retail Forex Brokers available for you.