The active Forex market offers beginners and experienced traders worldwide the opportunity to profit by trading currency pairs (major, exotic, and cross rates). Combining a properly chosen strategy, analyzing the market situation, and setting an acceptable level of risk will help a trader achieve the desired goal.
But, it is worth remembering that there are forex trading fees in addition to income, which is an inevitable part of making transactions in financial markets. Traders, entering such a dynamic sector, are sure of getting profit, but ignore the presence of additional, hidden commissions, which significantly affect the amount of income in the end.
When choosing a broker, it is necessary to analyze in detail what kind of cost structure it offers, what size of commission it charges: for account opening, for management, what spreads it works with, whether there are penalties for not using the account, etc. By placing a deposit, a trader automatically agrees to all trading conditions of the broker.
Understanding Forex Fees
The global foreign exchange market since the 1970s has allowed participants to trade liquid currency pairs, follow and copy the trades of successful traders, and develop their direction, but requires payment of forex fees for participation.
Commissions that affect a trader’s profits:
- Spreads.
- Commissions.
- Swap, rollover.
- Storage fees.
- Leverage.
- Custodial services.
The successful strategy of a trader depends on his skill and experience, study of platforms, and cost concept of brokers. Unaccounted commissions significantly reduce the result.
What Are Forex Fees?
It is important to realize that every Forex transaction carries several costs, which are often not fixed. That is, when making a transaction, the amount of costs will depend on the purchase/sale of a particular currency pair, the total amount of the transaction, the duration of the transaction, the margin set, the selected broker, the platform, and the market situation.
Although among the most common are considered: spreads, commissions, and storage costs, not all of them are applied to each conducted transaction.
Brokers with a good reputation and, a positive history of work on Forex, do not hide commissions and always list them in the trading conditions, even providing examples of calculations, either on the platform or on their website. They also provide online calculators where everyone can calculate how much Forex charges per transaction.
Types Of Forex Fees
It is important to know and take into account all types of transaction costs and their impact on a trader’s investment income
Types of forex broker fees are divided into direct and indirect costs.
Direct costs
- Spreads (floating and fixed).
This is the amount of difference between the buy and sell price, one of the most significant costs. The amount of commission varies depending on the pair being traded and the amount of the trade. Usually either a large spread or a high commission for the volume of the transaction. For the trader, all information is displayed in the trading terminal.
Spreads are the main income of the broker. One of the options to reduce such costs is to choose a broker that trades with narrow spreads and low commissions, as well as liquid currency pairs (not exotic). There are floating spreads, the size of which depends on the market situation, trading time, and economic situation. Fixed spreads do not change either from the choice of currency pair or from the amount of transactions. Fixed spreads are higher than floating spreads and are also included in the total cost of commission.
- Commissions (absolute and relative)
The commission is charged on the transaction or for account maintenance. Absolute commissions are calculated from the profit earned, and relative commissions are calculated from the amount of the transaction traded.
Often brokers publish a catalog of assets, and specifications of transactions on their website, or platform, in which all commissions are indicated.
- Swap, Rollover, Overnight
A fee for holding a position until the next trading day. This is the difference between the rates in the base currency and the quote currency. They should be monitored as they depend on market conditions and changes.
- Holding Fee
A fee for a broker to hold a particular asset in your portfolio. It is better to look for a broker that does not charge such a fee.
- Custodial fees
These are usually small fees for holding stocks, and bonds if the broker conducts trading in such assets.
- Leverage
By using leverage, a trader can make more profit as he has additional capital on top of his deposit. But, there is always a high risk of loss.
Indirect costs
These are costs that a trader may incur when withdrawing funds from the account or when the account is inactive, also for transferring funds. For inactivity of the account, usually, the commission starts to be charged after three months, the payment will be made until either active trading starts or the account limit is exhausted.
Slippage is a situation when an order is declared at one price, but the transaction takes place at a higher or lower price. It happened because the broker did not manage to submit the order to the interbank market in time. The situation can play into a plus if the order passes at a higher price than it was submitted. Then a broker with a good reputation will refund you the difference.
This happens most often in the more volatile cryptocurrency market, where the speed of transaction confirmation plays a huge role.
When the broker has the status of a tax agent, there is a tax deduction automatically (can reach up to 10% of all profits) or the payment of taxes is left to the trader.
How Forex Fees Influence Trading?
How much forex brokers charge will determine the amount of profit Spreads and commissions are the main income for a broker. When a trader trades with wide spreads, regardless of the amount of profit made, most of it will go to the broker for his work. Some traders charge commissions for placing a deposit, for transferring funds, for withdrawal.
Having understood the cost system of the chosen broker you can easily determine what costs will be when making transactions. You should also study the history of the broker’s transactions, what commissions and what amounts he usually operates with.
How Is the Commission Calculated?
When calculating forex commission fees, the following factors are taken into account:
- Commissions are charged per trade made or per account maintenance.
- Which broker’s commissions are fixed and which are floating.
- When opening an account, it is necessary to designate the amount of commission for the volume of transactions and their number.
- Additional small commissions, in total, can significantly affect the final result.
Transparent brokers will not hide additional costs, provide a calculator to calculate costs, and demonstrate the results of their work.
Tips To Minimize Forex Fees
To optimize forex trading fees, it is necessary to do some research and compare the cost of services from different brokers. Insignificant, but a large number of commissions can hurt the overall result.
If a trader has already developed a certain tactic that brings him income, then it is worth using robotic brokers to minimize costs. They will perform routine operations. Also, a trader who has a certain scheme of work can calculate what will be more profitable for him under his decision structure – payment for a transaction or account maintenance, the winning size of the spread.
The choice of a legal professional trading platform, where reputation is valued and no fraud is involved, plays a huge role. A license from the National Futures Association (NFA) guarantees the safety of brokerage companies, compliance with legislation, financial audit, and certification of specialists’ knowledge. Violation of the rules leads to a fine or revocation of the license. In Great Britain, the financial market is regulated by the FSA, and unfair activity of market participants can lead to criminal proceedings. In Europe, one of the most important regulators of the Forex market is CySEC, the forex broker license issued by it is valid throughout the EU zone.
For better awareness of traders, ratings of brokerage companies are published, and there are platforms with reviews of forex brokers. Regulators’ websites usually provide lists of those who have a license and those who have had their licenses revoked.
Summary
Along with receiving high income, one of the associated aspects of this activity is forex trading costs. However, they can be minimized by choosing a different trading tactic, assessing the market situation, or changing the broker. Knowing about all additional or hidden costs, you should remember that their monitoring has a positive impact on the final result.
Large volumes of trade are always high costs, you can reduce them by minimizing fees.
A reliable licensed broker is a factor indicating that the activity is regulated, checks and audits are carried out by state authorities, and in case of violations, the responsible person is punished.