Commissions in the Forex markets
- Evaluate the various commission approaches used in the marketplace.
- Understand what a broker will provide you as a partner in the markets.
- Learn what to seek in a broker relationship beyond just cheap fee structures.
- Decide which broker has the capacity to best serve your investment needs.
The Forex market features a unique quality that distinguishes it from other exchange-based trading arenas in that market players are often promised no regulatory or exchange fees, as well as no data and no commission fees. For a novice trader or new institution seeking to enter the Forex space, this appears irresistible, as being able to trade without incurring any fees provides a significant opportunity to maximize profits.
However, these promises, when considered fully, may not be the great deal they seem to be on the surface. In fact, they may not really be a deal at all and could even cost investors in the long run.
Typically, brokers in the Forex space utilize three types of commission structures: fixed spread, variable spread, and flat commission fee determined by the spread percentage. Understand, for example, that should you trade with a market maker offering a 3-pips fixed spread rather than a variable one, the disparity will be three pips every time, despite market conditions. In contrast, should a broker provide a variable spread option, you can anticipate that the spread will range from 1.5 to 5 pips, based on market conditions and the currency pair in play. In other cases, some brokers may charge a commission for their market activities. This may be as low as two-tenths of a pip to transfer your orders onto a larger trusted market maker. The benefit of this type of fee structure is that you can leverage a highly competitive tight spread that only large institutional traders typically can access.
What to look for in a trading institution
Whether you are a large institutional investor or an independent day trader in the Forex space, you should evaluate brokers beyond simply what type of commissions or spreads they offer. A broker may offer discount trading fees, but the platform used may not feature all of the applications you need to successfully and seamlessly navigate the markets in real time. Therefore, whatever you may save in commission fees, you may lose in your ability to leverage price action.
When evaluating a broker, consider also how much capital the institution has, how long it has been in existence, and the experience of its management and leadership. In addition, not all brokerage institutions will be able to provide you access to the markets, especially if you trade in currency pairs offering less liquidity. Remember that currency exchange market operates entity, whereby banks function as the dominant market makers, leveraging the relationships they have with other lending institutions and brokers to create trading spaces.
Making a Decision
To negotiate the best terms possible for your Forex trading, work with an established broker who has developed solid relationships with known foreign exchange institutions and has good capital. Do your homework on the spreads available for the most frequently traded currency pairs. Often, they will fall as low as 1.5 pips. In these instances, a variable spread may prove more attractive in terms of cost than a fixed one.
In fact, some brokerage institutions provide investors with the option of selecting either a variable or a fixed spread. Keep in mind, as discussed above, that although you may be receiving an apparent deal when you are offered a variable spread on your Forex transactions, you may be risking other advantages. Know that you will always pay the spread.
Ultimately, the most lucrative manner in which to trade in the Forex arena is with a solid institution that offers you the liquidity and tools to capitalize on price action. TRADE24 has established itself as one of the most secure and capable platform in the marketplace for Forex. Clients of Trade24 have access to an app for their smartphones that enables them to access the markets anytime from any location on the planet.