Traders and speculators are able to trade in the Forex market through an intermediary such as a Forex broker which executes the trades for them. Of course, their service does not come for free. Traders, whether they gain or lose, are charged with commissions and fees.
Role of a Forex Broker
A Forex broker takes your sell and buy orders and execute them. Because the FX market has no central exchange, FX brokers operate on the over-the-counter market. This should warn traders to take due diligence to make sure the brokers they deal with do not default.
Fees of Forex Brokers
Forex brokers make money through commission per trade or spread. Spread is the difference between the ask and bid price of a currency pair. Let’s take the EUR/USD pair with a Forex quote of 1.1844/1.1847 as an example. The bid price here is 1.1844 and the ask price is 1.1847. This means the broker is willing to buy the EUR at the bid price of 1.1844, and is willing to sell the EUR at the ask price of 1.1847. In this example, the spread is equal to 3 pips which goes to the broker’s pockets. Take note that a broker could also charge its clients both commission and spread for every trade.
Fixed and Variable Spreads
Fixed spreads, as the name suggest, do not change throughout the day regardless of the market conditions. Thus, with fixed spreads, you will usually save money. It also gives you greater transparency because you will know exactly how much it would cost you per trade.
Meanwhile, variable spreads change throughout the day. Important news or economic events can drastically move variable spreads.
Conclusion
The Forex market is a highly competitive place filled with aggressive brokers. Understanding how they make money can help you in choosing the right one. Before committing to a broker, we recommend that you do a bit of research on their regulation and trading conditions.
