THERE’S no such thing as a free lunch, as goes the old adage.
Forex is no exception, though it’s a mistake to think that trading Forex is an expensive venture to take part in.
The truth is that the commissions and transaction fees generated and paid out in this industry are minimal, just tiny percentages beyond the decimal point.
Loathe them or not, they are a reality of the Forex trading world, but they’re not the only costs you’re going to incur.
We’re going to look at the costs of trading, plus all of the add-ons and extras that you might want to consider investing in to boost your business.
The Compulsory Costs of Trading
You can’t escape the requirement to pay transactions fees, spreads, or commissions through every trade that you place with your broker.
Fortunately, the costs vary from one broker to another, so it’s down to your due diligence and research as to how good a deal you get. Those fees, at the end of the day, are super small, as low as $1 per $100,000 traded.
You might be thinking that this is a tiny amount, but for many Forex traders, the profits are built up incrementally by taking small profits on a large number of trades, so if you mismanage your transaction costs, you can damage your own attempts to make a substantial profit.
Now, be warned, brokers are always going to generate a profit on your trades, that’s a given, but the way in which they do it will differ.
Some retail brokers may offer you 0 per cent transaction fees and commissions, which lures in traders by the truck load! Unfortunately, these brokers then add their costs onto the spread and allow them to make an even larger profit regardless of whether the trade makes is profitable or not.
What is a spread in Forex trading?
You may have noticed at the airport currency counter, or if you’ve ever exchanged money at a currency bureau, that the broker has two prices for each currency pair. They offer a high price for selling to you (bid price) and a low price to sell at (ask price), meaning that they always win.
The difference between these two prices is called the spread, but it also includes a fee on top (in most cases) that allows the broker to make a bit extra and become extra profitable.
What does this spread look like?
● You want to buy GBP/USD and the price chart shows you 1.4000
● Your broker charges you 1.4003 to enter the position
● You have been charged three pips for the position (the spread)
● Imagine you want to sell at 1.5000
● When the price hits that point, you will pay the same spread, three pips above, so you exit at 1.5003
● The broker earned six pips for facilitating your purchase and sale
● Because of this fee, the trader knows that they need to make at least six pips from the transaction in order to profit, so if they are using a scalping technique, they need to be sure they won’t get stung
Let’s move on to some other fees and costs that Forex brokers or trading in general might charge…
● Inactivity fees
● Monthly or quarterly minimums
● Margin costs
● Customer service fees
● High volume fixed fees
● Leverage costs (can affect many other costs)
● Overnight rollover position costs (determined by the Interbank, not by brokers)
Forex brokers may offer additionals services, including…
● Access to a news service so that you can keep up to date with relevant changes that can affect the FX markets
● Custom technical analysis to help you adapt your strategies or give you actionable opportunities to improve
● Faster connections to make sure the speed of the market doesn’t harm your trading performance
● Better signals might be offered to give you information about how the broker themselves would trade, though these can often be wrong
Written and supplied by author Sarah Sidney
