Payment Options Available Today for 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 Structures
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.
Different Brokers, Different 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 explanation is that there are additional considerations to make when determining what is best 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.
This may be what you should seek for if you are dealing with a broker who can provide guaranteed liquidity at competitive spreads. On the other hand, if you are confident that you will always receive at-the-money executions, you might prefer to pay a fixed pip spread. You do not want to pay slippage, which happens when your trade is executed at a price different from the one you were given.
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.
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:
How financially stable is the company?
How long has the company been operating?
Who oversees the company, and what level of expertise does this individual possess?
Which banks does the company work with, and how many?
What volume does it deal in per month?
What order size guarantees does it make for liquidity?
What are the margin rules?
In the event that you want to retain your positions overnight, what is the rollover policy?
Does the company, if there is one, pass through the positive carry?
Does the company increase the rollover interest rates by a spread?
What sort of platform is it?
Does it support various order kinds like "order sends order" and "order cancels order"?
Does it ensure that your stop losses will be executed at the order price?
Is there a dealing desk at the company?
What should you do if you have an open position and your internet connection is lost?
Does the business offer all back-end office services, like P&L, in real-time?
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. In the end, the cheapest way to trade is with a very reputable market maker who can provide the liquidity you need to trade well.
Source :
- https://www.investopedia.com/