ForexNewsNow – If you’re looking to trade forex with an online forex broker, it’s probably safe to say you’re seeking a way to earn money and that’s why you’ve turned to forex. If that is the case, you’re going to want to trade with a foreign exchange broker that will help you achieve that goal – seems logical right?
In order to profitably trade forex, it helps to trade with an online forex broker that charges low commissions (or none at all) and offers low spreads on the currency pairs you plan to trade so you can maximize your return on your forex investments.
In this installment of “Top Forex Brokers,” we will discuss forex trading brokers’ commissions and spreads and what you should know and look for when selecting a potential foreign exchange broker.
Most online forex brokers earn their revenue via three different trading commission models: fixed spreads, variable spreads, and a commission based on a percentage of the spread.
If your forex trading broker is charging a fixed spread, it means that the spread will be set for each currency pair and will not fluctuate. So, for EUR/USD for example, a fixed spread broker receives the rate from its liquidity providers and adds 2 pips, for example, to the buy and sell rates that it offers to its traders. That means that if the broker buys the currency at 1.4320, they would charge you 1.4322 (+2 pips) to buy and take the 2 pips difference as their commission.
One example of a fixed spread broker is FXCM, which typically marks up the rates it receives by 1 pip.
With a variable spread, the spread will fluctuate based on liquidity, market volatility and other factors. Typically, the online forex broker will list a range of spreads that will be offered for a specific currency pair – for example: 3 – 5 pips. In this case, the broker may buy USD/JPY, for example, for 88.30 and offer it to traders to buy for 88.33 (+3 pips) during certain times and 88.35 (+5 pips) at others.
Some foreign exchange brokers charge a small commission of 1/5th of a pip, for example, and then pass the currency order to a larger market maker or another liquidity provider that they have a close relationship with to complete the order.
Other forex trading brokers charge a small commission per trading lot ($100,000), which may be anywhere from $3 to $5 per lot. ForexYard, for example, charges a commission of $4 per lot.
How to Choose a Forex Broker
The first thing to do when considering investing with a forex broker is to find out what commissions they charge. Once you’ve figured that out, you can then do a cost/benefit analysis on their commissions versus what advantages the brokerage may offer.
For example, it may be worth it to trade with a forex broker that charges moderately higher commissions if that broker gives you access to extremely low spreads on your most traded currency pairs and/or offers a unique trading platform or charting features that aid in your overall trading returns.
Moreover, it may be a good idea to trade with a broker that charges moderate commissions if the broker is regulated by the NFA (or your local regulatory body), well capitalized and has a strong reputation and record. It’s better to forgo a few pips every now and then in order to have the peace of mind that your investments are safe and secure.