Commissions and additional costs when trading in the Forex market

stock-exchange-3556719_1280Every person comes to the financial markets with one single goal – to make a fortune. Traders want to benefit from active purchases and sales for which they develop strategies for technical analysis. Investors are looking for profitable deals in the medium and long term based on fundamental analysis. Analysts make money from forecasts that both groups of market players provide. Also, brokers in this case are no exception – they also carry out their activities to earn money by providing services to traders and investors.

Brokerage companies charge commissions and additional fees for their work, which is quite acceptable, but many of them significantly tighten the costs of their services. For the average trader, increased commission fees can serve as a significant obstacle to earnings, because the lion’s share of income will be taken by the broker as a commission, and losses in this case will increase significantly.

In order not to become a victim of such frauds, it is necessary to carefully select the brokerage company through which you will carry out its operations, and most importantly know in detail about all types of fees and take them into account when choosing a broker and in trading.

In this article, we will look at the following types of forex fees and related aspects:

Brokerage commissions

  • Commissions on deals
  • Commissions at ECN
  • Commissions for entry and withdrawal

Spreads

  • Fixed spread
  • Floating spread
  • Markup

Swaps

  • Types of swaps
  • Swap surcharges
  • Swap trading strategy

Brokerage commissions

A brokerage commission is a fixed fee for a transaction. As a rule, the commission for opening and closing a transaction is considered. This practice is the norm for stock, fixed-term and commodity markets – for each transaction the broker charges a certain fee. Also on the stock market in addition to brokerage there is an exchange commission – a similar fee for the purchase or sale of one asset.

Brokers in the foreign exchange market as an advertising move decided to exclude brokerage commissions – so in PR companies often sound shares “forex without commissions.” In fact, commissions are present, only in this case they were moved as spreads, swaps and additional fees.

Some forex companies have introduced additional commissions on ECN and large transactions, justifying this fee by bringing the transaction to real markets. However, the veracity of this operation is very doubtful and most of these fees still go directly to the brokerage company.

Some brokerage companies charge additional commissions on the entry and withdrawal of clients’ funds. When choosing a brokerage company to trade in the Forex market, it is best to avoid cooperation with brokers who charge their own fees for money transfers.

Spreads

A spread in trading is the difference between the bid and ask price. At one point in time it is impossible to buy and sell an asset at the same price – there is always a spread – the purchase price ask is always just above the current value displayed on the price chart, and the sale price of the bid is always lower by a few points. Consider as an example EUR/USD and the hypothetical price on the price chart of 1.1010, while in the quote glass we will see the purchase price of 1.1006 and the sale price of 1.1014. The difference between the purchase price and the sale price, in this case 8 points and is a spread.

Spread is the norm for any financial, currency, stock or commodity markets – the difference in the queue of applications should always be present, otherwise all market players instantly converged in price and transactions would no longer be carried out. Spread is always lower on liquid instruments, such as currency pairs – majors, as well as during active trading – during the European and American trading session. Accordingly, during periods of sedentary trading sessions, as well as on exotic illiquid instruments spreads will be higher. Spreads can also narrow during side savings and expand during peak activity, such as when important macroeconomic news is released.

In the Forex market, the spread is formed not only by market conditions, but also by the broker, as the spread surcharge is one of the subspecies of the hidden commission of the broker. Thus, the broker increases the market spread to compensate for the exclusion of an open brokerage commission. This type of commission – the spread allowance is called a mark.

There are two types of spread that forex brokers offer:

  • Fixed – always the same-set spread size at any time of market activity;
  • Floating is close to a real spread that has the ability to expand and narrow to the market state.

Fixed spread, despite the apparent simplicity and predictability, actually comes out significantly more expensive floating, especially if you plan to actively trade inside the day on several trades.

Some Forex brokers declare a complete absence of a commission on spreads or so-called “zero spread.” It should be understood that it is impossible to exclude the spread, as it is a natural market difference and if the broker declares that there is no spread in its tariffs, then in some other aspects it will obviously return its money. And it will be very deplorable if these aspects become – hand-drawn graphics, shooting stops and other adventures.

Swaps

A separate commission, which is called a swap, is also charged for the transfer of an open position to the next trading session. The calculation of the commission swap is individual at different times and depending on the chosen currency pair, as the size of the swap is based on the difference of the underlying assets of the two countries whose currencies are part of the currency pair. Swap commission is not a whim of a brokerage company, but a feature of the foreign exchange market as a whole. Central banks of different countries set their interest rate, which must be taken into account when making transfers to the next trading session. Technically, the transfer of the position from the broker looks like this – one currency from the pair broker puts into an escrow account, and the other currency takes on credit. That is why the interest rate, the cost of which falls on the trader, is taken into account. This means that for each day of holding the position will be recalculated swap commission, which can fundamentally increase the loss or significantly reduce the profit on the position.

But the swap can be not only negative, but also positive, because it all depends on what is the difference between the currency bought and sold. For example, if a trader has opened a deal with the USD/CNY currency pair and when the basic interest rates of the US bank 1% and the Bank of China 4% are calculated negative difference, in this case the position of the trader on the contrary will be accrued a positive premium.

Conclusions

In this review, we have looked at the main types of trading costs that the trader expects from a brokerage company. You should also take into account the fact that the broker can impose additional fees for the service news, subscriptions, mailings, etc. When choosing a brokerage company should give preference to the fact that openly cover all their tariffs and do not agitate with slogans – “forex without commissions,” “zero spreads” or the absence of swaps.

With a normal trading strategy and compliance with all the rules of risk management and mini-management, the presence of commissions will not affect the profitability of the trader and, accordingly, his income. The availability of commissions is a normal practice for all markets, however, one should be vigilant and not allow the broker to impose unnecessary costs and charge more.

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