Forex may seem available to anyone who wants to participate. But it’s partly true: Forex is not free, by chance. It’s not expensive either, which creates an interesting paradox.
What you really need to know is that you have to pay certain fees and commissions if you want to participate in Forex trading. They may not be tall, but there should be no misunderstanding about their existence.
Compulsory purchase and sale costs
Payment of transaction fees or commissions for each transaction made with yours broker is required. Fortunately, costs vary by broker, so it’s up to you to do your research on the type of trade you are about to enter.
A common misconception is that since these are small amounts, you shouldn’t pay them that much attention. But for some forex traders, profits are accumulated gradually by taking small profits on a large number of operations. This means that if you fail to manage your trading costs in an orderly manner, you risk jeopardizing your own attempts to make a large profit.
That said, you need to be clear that brokers will always generate a profit on your trades, but it’s how they do it that will make a difference. Consider the special case where retail brokers offer you 0% commission and transaction fees, but ultimately, these brokers can add their costs to the spread and allow them to make an even greater profit regardless of whether the operation is successful or not.
What is a spread in Forex trading?
If you already have some experience in Forex trading, you may have seen at the airport currency counter that the broker offers two prices for each currency pair. They offer a high price to sell to you (bid price) and a low price to sell to you (asking price). The spread is the difference between these two prices. The spread also includes, in most cases, additional fees.
Variable rate spread
It should also be noted that the spread to be paid may depend on the volatility of the market and the currency pair traded. These variable spread fees are common in markets with higher volatility.
Some brokers also charge a fee for handling and executing the transaction. In these cases, the broker can only increase the spread by a fraction or not at all, because it mainly earns from the commission.
What is the commission and how is it calculated?
A commission in Forex trading can be a fixed commission – a fixed amount regardless of volume – or a relative commission. This basically implies that the higher the trading volume, the higher the commission.
A commission is similar to a spread in that it is charged to the trader on every trade made. The operation must then make a profit to cover the cost of the commission.
Forex commissions it can take two main forms: a fixed commission, where the broker charges a fixed amount regardless of the size and volume of the trade placed, a relative commission, which is the most common way to calculate a commission. The amount charged to a merchant is based on the size of the transaction. In other words, the higher the trading volume, the higher the monetary value of the fees charged.