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Important Things You Must Know About Forex Fees

Forex FeesForex trading can make you a lot of money, but Forex trading has also got its challenges. As a
Forex trader, you also need to put into consideration the issue of cost. Forex trading is profitable,
but Forex trading is not free. You will have to pay a fee on many of the activities you do on a
Forex trading platform. The Forex fees you pay on each of these activities are referred to as the
cost of trading Forex. Just like your normal offline business costs you money, Forex trading will
also cost you money. We can say that the cost of trading Forex is the running cost of the Forex
trading business. So, Forex trading is not entirely free as many may want you to believe. You
need to find answers to how much does Forex cost before you venture into Forex trading.

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Who charges the fees?

Lest we forget, the entity charging you the fees is the Forex broker. The fees you pay on Forex
trading are fees on several services you get from the Forex broker. The broker can charge you
fees on various activities or services. However, the broker is not the only entity that costs you
money to trade Forex. Before you can trade Forex, you need to get an internet connection. This is
not free most times. You may also want to buy or code a custom indicator to make Forex trading
a lot easier for you. Some professionals offer news services or Forex signal services. Such
services are not provided for free most times. Aside from the services you pay for on the Forex
broker’s platform, some other services you will have to pay for as a Forex trader are:

  • News services
  • Custom technical analysis
  • Faster connection

Be that as it may, data exchange fees and the items in the list above are optional. You can
decide to pay for them or not. So, you can call them optional costs of trading Forex.

Who charges the forex fees

Optional and Compulsory Costs

The optional costs are those costs that are not entirely necessary. They are the cost of items or
services that you may not have to pay for before you can trade Forex successfully. This is
because you can get some of the items on that list for free and you will not have to pay money
for them.

The case is different with a compulsory cost. Even its name indicates that you will need to pay
these fees if you must trade Forex. You cannot avoid paying a fee on every trade that you place
when you trade Forex. The compulsory Forex fees, in this case, are fees you pay to the broker
you register with. A trader is under compulsion to pay a fee on every trade that he places on the
Forex market with a broker. While it is true that the broker is the entity that determines how
much you pay as a commission, it is also important to state that the commissions are generally
low. Aside from the commissions, you pay to the broker on every trade you place, you may also
need to pay a couple of other fees to benefit from the services you get from the broker.

Impact of the fees

The commission seems to be low and many traders tend to overlook it. However, the amount you
pay as a commission to the broker can accumulate over time. This means that the overtime
accumulation can reduce how much you can make as profit in Forex trading. You may end up
losing most of your profits because of the mismanagement of the compulsory costs of trading
Forex. Studies show that many Forex traders underestimate Forex fees and this can lead to the
loss of their profits. We can refer to a Forex trader as a fund manager. For him to be successful in
fund management, he needs to take a good look at all the costs and challenges involved.

Types of Compulsory Costs of Trading Forex

Forex Spread/commission

Forex Spread

This is the most common of all the costs you will have to bear as a Forex trader. It does not
matter how successful you are as a Forex trader, you must pay commission and spreads to the
broker. We can, therefore, call the spread and commission compulsory fees. The spread and
commission differ from one broker to another. As a result of this, you need to bear this
difference in mind when looking for a Forex broker you can register with.

What is spread?

We can define the spread as a fee that the trader needs to pay to the broker. It is a fee charged by
the broker on each trade that the trader places on the trading platform of the broker. Two prices
occur on each currency pair at any particular time. These include a price to buy that asset and a
price to sell it. The price to buy is the bid price and the price to sell is the ask price.

The spread of any currency pair is the difference between the ask price and the bid price. The
broker can make money from your trading activities by charging you the spread. Every trade you
open will start with a negative price and this negative represents the amount the broker charges
you for that trade. This is also the spread. You will need to first pay the spread before you can
start making a profit.

Pip spread example

If you want to buy a particular asset, say EUR/USD, the trade starts with a negative profit/loss to
indicate the spread deduction. If the price on the chart is 1.2000, the broker will quote bid and
ask prices that are slightly different from this. The bid price can be 1.2002 and the ask price can
be 1.2000. If you place a trade at this point, the broker will start the trade for you at 1.2002
instead of 1.2000. This means that you will start with a negative of 2 pips. It indicates that the
spread on that asset at that particular time is 2 pips. The illustration above is for a long trade.
Bear in mind that long trade in Forex means a buy trade.
The reverse is true for a short trade. Short trade means a sell trade. If the price on the chart is
1.2002 and the pip spread is 2 pips, the broker will start the trade for you at 1.2000. This also
means that you will have to pay a pip spread or 2 pips once you enter the trade. The pip spread
will also count when you want to exit the trade. So, we can conclude by saying that the pip
spread is the difference between the buy and sell prices of a currency pair or any other asset.

Pip spread

Payment To Brokers

The pip spread is a way of paying the broker for its services. It is also among the compulsory
Forex fees. The bid price is the price that the Forex broker will pay to buy that currency pair or
instrument from the trader. The ask-price is the lowest price that the broker will pay to sell that
currency pair or instrument to the trader.
If the trader is to make money from trading that particular pair, then the price must move in his
favor. The price must also move more than the cost of the spread in his favor.

Variable-rate Spread

The volatility of the Forex market at that particular time can also determine the spread that you
have to pay. The currency pair you are trading also determines the spread you need to pay. When
the market volatility is high, then the trader will be paying a variable rate spread. When the
volatility is low, we say the Forex market is quiet. This means that market activities are not
much. In such a situation, the pip spread tends to reduce. The reverse is the case when the
volatility of the market is high. The risk is higher in such a situation and the fees will also be
higher. In such a situation, the pip spread can increase drastically.
Additionally, you may have to pay commissions to the broker for executing and handling trades.
This is another type of fee. The amount also depends on the particular broker. In such a situation,
the broker can charge only a fraction more o0f the available spread. This is because the broker
makes money mainly from the commission that the trader pays per trade.

What is the commission?

What is the commission?

There is a similarity between the commission and the spread. The commission is of two types.
They are:

  • Fixed-rate commission: This is the commission you pay as a trader as a fixed sum
    irrespective of what the trading volume is. This means that an increase or decrease in
    volume or size of the trade does not have any effect on the commission. The Forex fees
    are always fixed in this situation.
  • Relative fee commission: This is a commission you pay relative to your trading volume.
    This means that the amount you pay as a commission will increase as your trading
    volume increases. This is the more popular way of charging commission by brokers.
    The similarity between the commission and the spread occurs in that the trader will have to pay
    both on every trade. This means that a trader will only record profit for it to cover the cost of the
    commission.

Other Fees to Consider

Many brokers charge deposit fees and withdrawal fees. Some brokers do charge hidden fees.
You need to consider these fees before you start trading that Forex broker. The hidden fees
depend on the particular broker you are dealing with. Some brokers will charge their customers

inactivity fees. This is the fee you have to pay if you do not use your trading account for a very
long time. This fee is usually fixed. Also, some brokers can charge quarterly or monthly
minimums. This means that these brokers will charge you a particular fee every month or every
quarter.
The number of brokers that charge such a fee is few. Margin in Forex trading is yet another
cost that many brokers charge. Some brokers do not provide toll-free phone calls and this means
that the trader will have to pay for airtime each time he calls the broker. All these add up to
increase the Forex fees the trader has to part with. In summary examples of hidden fees are:

  • Service charge on phone calls
  • Margin costs
  • Monthly or quarterly minimums
  • Inactivity fees

Before you decide on the most cost-effective commission model, you need to first consider our
trading style. Your trading style will help to determine if that particular commission model is the
best for you or not. If your trading involves the use of high volume for example, then it is better
to use a broker that offers a fixed fee. This will help to reduce the cost of trading. If trade volume
is low, on the other hand, you should rather go for brokers offering variable fees. Such a trader
will end up paying low fees for trading activities.

Leverage

Leverage helps the trader to increase returns on his little investment. Forex brokers can easily
access leverage and this is one of the reasons why Forex trading is attractive to many. While
leverage can help the trader to make huge profits from a very small capital, it can also cause the
trader to lose his funds fast. If the trade goes in your favor, the use of leverage will increase your
profit tremendously. If the trade goes against you, on the other hand, the leverage will lead to a
huge loss for you. Therefore, you need to use leverage very carefully when you are trading
Forex. Bear in mind also that using high leverage can increase the fees for the trader. So you
should always use leverage very carefully to avoid inflating the cost of trading.

Leverage

Overnight position

When you allow a trade to run overnight, the broker will charge you a fee for that. The name of
this fee is a Forex swap fee or overnight rollover. You should factor in this particular cost when
considering the costs of trading Forex. There is an overnight interest rate on every trading
decision you make. You will only pay this cost if you do not close that position before it extends
into another trading day. Overnight fees do not go into the pocket of the broker. Rather, it is
charged at the interbank level. If you buy or sell USD/JPY for example, the overnight rollover on
that trade will be the difference between the interest rates of the United States and Japan.
If the interest rate of the United States is 5% and that of Japan is 4%, the Forex trader will get a
payment of 1% when he opens a trade on USD/JPY. This is because you are buying or selling
the currency from the country with a higher interest rate. The will receive a 1% interest rate of
the pair. On the other hand, you will have to pay a 1% interest rate when you sell the currency
pair.

Overnight position

Data feeds

You will also need to consider extra costs as a transaction cost when you want to calculate your
overall profitability. You can use data feed to see what is currently going on in the Forex market
at any time for that matter. It can be presented in the form of price action analysis and news. The
trader can then use the data to make trading decisions. Additionally, the Forex trader can use data
feeds to make the following trading decision:

  • Where you should set the stop loss
  • How you can successfully manage an open position
  • When it is right to enter and exit an open position.

The data can be directly linked to the performance of the Forex trader. The trader will be able to
maintain an edge regularly in the Forex market if he has access to good efficient data. The data
feeds provide such helpful information.
The Forex fees are fixed and payment is once in a month. The costs vary between Forex brokers
the quality of the data is also not the same across the board. You should only work with a broker
that offers qualitative data. You should only go for the type of data you feel comfortable with.
Find out if you can trust the content of the data feed before you place your money on it.

Conclusion

The trader may pay for magazine subscriptions or television packages. Televisions packages will
give you access channels for continuous financial news. If you are a novice trader, you may also
want to consider the cost of attending tutorials, shows, and exhibitions. Needless to say, a Forex
trader also needs to bear in mind the cost of buying a laptop or a PC. The trader will equally need
to consider the cost of cupboards that he may want to stock with coffee to boost his
concentration. You should pay attention to all Forex rates. If you do not, it can limit your profit
in Forex trading. The trader must always pay attention to the use of leverage. Leverage is a two-
edged sword. It can make you a lot of money and can also cause you a huge loss. So, you should
use it with care.