Learning the Forex Market – Commissions, Spreads and Trading Costs

Undoubtedly, forex trading is on the rise. Several forex brokerages are being opened at a very high rate, and several folks are now leaving their jobs to trade forex.

It’s not rocket science as to why all that is happening as it’s because the forex market is far bigger, it’s simple and with enormous potentials for profits.

But what makes it different from the other financial markets?

Trading costs

When you think about forex trading, and for example, the stock exchange, some basic differences such as more volatility, higher liquidity, high leverage, low trading commissions as well as costs come into the mind.

So, let’s specifically look at how the trading costs, as well as commissions in forex, compared to the other global markets.

The Stock Market

In the stock market, a trader is charged a commission on both sides of a trade. It means that a trader makes the trade in cooperation with the broker, who charges a fixed amount per trade, per share, or some scaled commission depending on the size of the trade. Furthermore, the commission is applied both when buying and selling a stock.

Forex Trading

When looking at the forex market, forex brokers do not charge commission. However, a few brokers will advertise that they do charge some commission like in the stocks.

Therefore, it means that the forex market lets all traders open as well as close positions without a commission.

But how do the forex brokers make their money?

As much as they advertise that they do not charge a commission, forex brokers also make money. It gets a little bit tricky here. No commissions charged by brokers-true, but they don’t trade out of their heart’s goodness.

In fact, forex brokers come out on top, literally in a big way. What they charge is known as forex spreads, which is the difference between the price a broker will buy from you and the price they’ll sell the currency.

Therefore, as much as it doesn’t sound like a commission, the principle is merely the same.

It’s, therefore, essential to understand the costs related to trade before making major decisions. The main principle about the forex market is that it’s based majorly on the supply and demand like most markets.

Trading costs

For instance, with high demand for the USD, its value goes up against other currencies, and that’s how spreads are defined as well as calculated.

Unlike the stock market, the spread is charged only on one side of a transaction, meaning a trader won’t pay a spread when buying and also when selling; it’s only charged once on the buying side of a trade.

Things to Keep in Mind

Now you must understand that the spreads are not uniform across several brokers.

Different brokers offer different spreads, and that small difference can be your game-changer in the long run.

For instance, a 5 pip spread against a 4 pip spread; over time, the difference could be massive.

Moreover, the spreads vary depending on the type of currencies being traded and the type of account a trader opens. For instance, the popular EUR/USD or GBP/USD currency pairs have the lowest spreads from brokers, while currencies with less demand have higher spreads.

Similarly, the type of account opened can be subject to a different spread, like a minim account has higher spreads compared to a full contract account.

Also, even the fixed spreads do change periodically; hence, it’s significant to stick to what the broker charges.

You should also be aware of the brokers that offer fixed spreads as they restrict trades, especially during the news releases when the market is volatile, and thus the insurance doesn’t really help.

Conclusion

Having a clear understanding of the commissions, spreads, and the trading costs in forex trading can help any trader in making educated decisions regarding their forex trading strategies.

Therefore, ensure you know the currencies you’ll trade, how frequent, and the type of account to use, and that way, you’ll stay on top of the game ready for the market.