Understanding Broker Fees in Forex
A broker fee is how forex brokers make money. Brokers charge traders fees based on the spread. The spread is the difference between the bid price and the ask price, or the selling price, of a specific currency pair. For example, if a broker has the pair USD/JPY listed as 1.2545 – 1.2548, the spread would be three pips. A pip is the unit of measurement that is used to describe the spread and is equal to $0.001.
Additionally, if the pair USD/JPY is listed as 1.2545 – 1.2548, then you would be paying $1.2548 for every USD/JPY, but can only sell each pair for $1.2545. This leaves the broker with $0.003, or three pips, for every single USD/JPY pair that you sell.
It is also important to understand that different brokers offer their users different types of spreads, known as fixed spreads and variable spreads, which generally range anywhere from 1.5 to 5 pips. A fixed spread is a type spread that remains constant, regardless of how fast prices are changing or what currency pair you are trading.
A variable spread is a spread that will change according to the current volatility of the market. If prices are changing at a rapid pace, the spread will increase. A variable spread will also depend on the currency that you are trading. Generally, the GPY ( Pound vs. Yen)and the GBP ( Pound vs. Dollar) will have a higher spreads than other currencies.
The last way that brokers charge their traders is by collecting a commission off of the spread. This commission is usually a very low portion of the spread, commonly 20% or 30%. Once a trade has been completed, this type of broker will usually transfer the trade to a large investor. While this means very low cost trades for small investors, most brokers do not operate in this manner.
The most common type of broker are those that offer traders variable spreads. However, it is important to carefully consider each type of broker and review your options, before selecting a broker with which to trade forex.