Understanding Forex Broker Commissions and Fees

Understanding Forex Broker Commissions and Fees

Reading time: 11 minutes

To operate and facilitate online trading services in the foreign exchange market, brokers must apply commissions and fees. A thorough understanding of the commissions and fees is imperative for any trader or investor; this includes being aware of spreads, commission structure and swaps, and additional charges like inactivity fees. 

The ABCs of Trading Costs in Forex

1. Spreads

The spread, one of the most common fees in the Forex market and the initial cost of entry into a trade represents the difference between a currency pair's buying price (ask price) and selling price (bid price). 

The difference between the bid and ask values is called the Bid/Ask spread and is how a broker generates most of its revenue. The spread, measured in pips (the most minor price move in a currency pair), varies by broker and currency pair. You will find many regulated brokers, including FP Markets, offer variable spreads which are dictated by the market conditions.

Liquid currency pairs such as the EUR/USD is a widely traded pair and thus works with narrow spreads. This means it will be cheaper to trade than, say, an exotic currency pair that generally has less liquidity and wider spreads. 

2. Commissions

Depending on the Forex Account Type you select with FP Markets, the Standard Account does not charge a commission; the commission is built into the raw spread of the product (Forex, Metals, Commodities, Index and Cryptos). To help understand this, the spread is derived from liquidity providers. FP Markets adds a markup to the raw spread to generate a commission per trade. 

If you prefer to trade with spreads derived directly from the liquidity providers, then the Raw Account could be the better option. Spreads are filtered to the trader/investor directly from the liquidity provider along with a commission (a flat pro-rata rate [Forex pairs and Metals only, with the remaining products trading similar to a Standard Account]). The commission per side is 3 USD per standard lot traded, plus the raw spread cost.

3. Swaps

In foreign exchange trading, a swap is the interest paid at the time of rollover. It is extending the settlement date of an active trade to the next trading day, referred to as Tomorrow Next, or Tom-Next. 

To hold active positions past 17.00 New York time (00.00 server time), a swap rate is applied to any Forex position. An interest adjustment will be made to the account; the client will either receive interest (a credit) or incur a debit for holding a position overnight. Swap rates are mainly derived from the interest rate differentials between the two currency pairs. The swap is calculated by the position size, the swap charge, the duration the trade is active and whether the position is long/short. Forex traders should also be aware triple interest is debited/credited on Wednesday, covering the weekend as brokerages and banks close. 

Impact on Trading Style

Scalpers and Day Traders

If you're a scalper, speed and efficiency are your friends. 

You're the sprinter of the trading world, aiming to make quick gains from M1 (1-minute) and M5 (5-minute) timeframes. Scalpers are particularly sensitive to spreads and commission fees; they generally trade larger position sizes to generate a worthwhile return. This, of course, can increase the spread cost and the commission with more trading volume (lots traded).

Scalpers, nevertheless, will be unaffected by swaps as they close their positions on the same day. Scalpers, therefore, seek brokers offering the tightest spreads and lowest per-trade commissions to maximise their small, frequent gains.

Like scalpers, day traders often open and close positions within a single trading day. This journey also frequently aligns with the trading sessions of major financial hubs like London, Asia, or New York, and sometimes merges into the overlaps between these significant trading sessions.

While a day trader will execute fewer trades than a scalper (usually around 1-3 trades per day), a day trader will still seek narrow spreads and low commissions as their position size tends to be sizeable as their take-profit objectives are small compared to swing and position traders. The pip value (therefore, the spread cost) will be larger. The spread will be significant for short-term traders as it can influence their risk-reward metrics far more than those who trade medium to longer-term positions. For example, if you are scalping or day trading and the take-profit objective is 9 pips (with a stop distance of 5 pips), and the spread is 2 pips (which is entirely possible on some minor and exotic currency pairs), the trader will automatically be down two pips before the trade even gets going. The trader then must make 11 pips to reach their profit objective. But with a longer-term trade that targets, say, 100 pips, 2 pips is less meaningful and the spread cost will be less important as the pip value is generally lower. Nevertheless, this assumes that the short-term trader and long-term trader work with the same risk profile. For example, if the day trader has a 10,000 USD account and risks 2% on positions with a smaller entry/stop distance than, say, a swing trader with the same account size and risk, then commissions and spread should be less for the swing trader.

Swing and Position Traders

Swing traders, who often hold positions for several days or weeks, find themselves in a unique spot. While they aren't as affected by spread as scalpers or day traders are (again, assuming all work with the same risk profile), they still need to account for the commissions (though they should theoretically be less as the lot size will be smaller given the distance from entry to stop is greater). The swap, however, can influence a swing trader’s profitability, as the longer they keep the trade running, assuming the swap is a debit, the more the account equity is affected.

For position traders, the narrative shifts. These traders are more focused on the end goal. They pay less attention to the short-term ups and downs of their trades. They typically make fewer trades, sometimes holding positions for months or years in hopes of aiming for substantial price moves (usually targeting trending markets). Much like a swing trader, the swap will be of importance for position traders, particularly for those positions kept open for months at a time. However, the spread and commissions should be less of a concern for these longer-term positions if risk remains the same as those trading shorter term.

Final Thoughts

Understanding broker commissions in Forex can significantly influence how you make trading decisions and approach the Foreign Exchange Market.

With FP Markets, you select a broker committed to enhancing your Forex trading experience with clarity and transparency. Our market-leading spreads and commissions allow all trading styles to trade with confidence.