Perhaps one of the most unique features of currency trading is that forex brokers do not charge commissions to their clients. Also, there are no exchange or regulator fees. But make no mistake – these brokers are not charity institutions – they have ways to take money from you. Instead of regulatory fees, they debit rollover rates to your accounts. Instead of a commission, they charge the bid-ask spread.
While trading without transaction is really an advantage, it is not actually a bargain. Some brokers have disguised offers which entice new clients to sign up. Hence, unless you have direct access to the counters, you will need to know if your broker is charging the right rates. One of the best way to do this is to determine the different commission structures which are currently in use.
1. Fixed spread
Just to review, the spread is the difference between the price that the buyer of currency is willing to pay (bid price) and the price that the seller is willing to accept (ask price). When you trade with a broker, you will see 2 prices for a currency pair.
For example, in the currency pair EUR/USD, the bid price is at 1.2857 while the ask price is at 1.2860. The spread in this case is 0.0003 (or 3 pips). Depending on the movement of the market, the bid or ask price may change. In a fixed spread scheme, the broker will maintain the 3 pip spread, regardless of market volatility.
2. Variable spread
In a variable spread scheme, the spread can be as low as 1.5 pips to 5 pips, depending on the volatility of the market. In this case, the more volatile the market is, the higher the spread will be.
3. Commission based on the percentage of the spread
In some instances, brokers will charge a very low commission (usually 2/10 of a pip). In this case, clients are able to purchase contracts at face value. The broker receives the orders and executes it over the counter. This scheme is typically used by financial institutions which are able to trade at bigger volumes.
How to determine if your broker is charging a fair rate
Despite what forex brokers claim, when it comes to currency trading, there is no such thing as free lunch. To determine if your broker is charging a fair rate, it is best to get a track record.
The bigger players, those who have direct access to the counters are able to get the best rates and are able to pass on these savings to their clients. Those who trade at higher volume are offered tighter spreads, which then leads to higher profit.
Article source: etoro.com
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