Methods for Paying Your Forex Broker
The forex market has a special feature that many market makers employ to encourage traders, unlike other exchange-driven markets. They guarantee there will be no commissions, exchange fees, regulatory costs, or data fees. This seems too good to be true to a novice trader looking to get started in the trading industry.
It is obvious that trading with no transaction fees is advantageous. To new traders, a deal could appear to be a good deal, but it might not be the greatest offer available or even a deal at all. Here, we'll show you how to compare the fee/commission structures of forex brokers to determine which one will work best for you.
Commission Systems
Forex brokers utilise one of three types of commission. Others charge a commission based on a percentage of the spread, while yet others offer a fixed spread, a variable spread, or both. So, which one is the best? The fixed spread appears to be the best option at first glance because you would know exactly what to anticipate. However, you need think about a few factors before choosing one.
The spread is the difference between the market maker's willingness to purchase the currency from you at one price (the bid price) and their willingness to sell it to you at a different price (the ask price). Consider the quotes below when they appear on your screen: EURUSD: 1.4952; 1.4955. The difference between the ask price of 1.4955 and the bid price of 1.4952 amounts to a spread of three pip. No matter how volatile the market is, if you are dealing with a market maker that offers a set spread of three pips rather than a variable spread, the difference will always be three pips.
Depending on the currency pair being traded and the level of market volatility, you can occasionally expect a variable spread from a broker to be as little as 1.5 pips or as high as 5.
Some brokers may also charge a negligibly little commission, perhaps two tenths of one pip, and then pass your order flow on to a significant market maker with whom they have a business relationship. You can benefit from a very tight spread that would otherwise be available only to larger traders under such a deal.
Choosing a Forex Broker
When choosing a broker, traders should always take the whole package into account in addition to the spread types the broker offers. For instance, while some brokers may have outstanding spreads, their platforms might not have all the features provided by rivals. The following things should be considered while selecting a brokerage company:
- What volume does it deal in per month?
- What order size guarantees does it make for liquidity?
- How well capitalized is the firm?
- How long has the company been operating?
- Who oversees the company, and what level of expertise does this individual possess?
- Does it support various order kinds like "order sends order" and "order cancels order"?
- Does it guarantee to execute your stop losses at the order price?
- Does the firm have a dealing desk?
Even though paying a variable spread may seem like a bargain, you can be giving up other advantages. However, there is one thing you can count on: As a trader, you always pay the spread and your broker always makes money off of it. Choose a trustworthy broker with strong ties to the major foreign exchange banks who is well-capitalized to get the best possible deal. Look at the spreads for the most traded currencies.
They frequently just measure 1.5 pip or less. In this situation, a variable spread can end up being less expensive than a fixed spread. Even better, some brokers let you choose between a fixed spread and a variable spread. The most affordable approach to trade is ultimately with a highly regarded market maker who can give you the liquidity you need to trade successfully.
Various Brokers, Various Service Levels
What is the overall impact of each form of commission on your trading, then? This is a challenging issue to answer because not all brokers are made equal. The reason is that there are other factors to take into account when weighing what is most advantageous for your trading account.
For instance, not every broker has the same ability to create a market. The forex market is an over-the-counter market, so banks, the principal market makers, have dealings with other banks and price aggregators (retail internet brokers) based on each company's capitalization and creditworthiness. There is only the credit agreement between each player; there are no guarantors or exchanges. The efficacy of your broker will therefore depend on their relationship with banks and how much volume they conduct with them, for example, when dealing with an online market maker. The spreads quoted to bigger volume forex traders are typically tighter.
The brokerage company will be able to pass on the average bid and ask prices to its retail consumers if your market maker has a solid working connection with a line of banks and can combine, say, 12 banks' price quotes. The dealer can offer you a more competitive spread than competitors with less capital, even after modestly widening the spread to account for profit.
Whether you should pay a tiny charge to a commission broker depends on the other services the broker provides. Consider a scenario in which your broker offers you access to a proprietary software platform that is better than the platforms used by the majority of online brokers in exchange for a tiny commission, often in the range of two-tenths of one pip, or roughly $2.50 to $3 per 100,000 unit deal. In this situation, it might be worthwhile to pay the modest commission for the extra service.
Source :
- https://www.investopedia.com/