A common question asked by retail currency traders who are new to the forex trading business is that of the commission charged for trading. Whilst there are some Forex brokers that to charge a small commission on the trade, a common practice amongst the forex brokers is to charge what is known as the spread, which is where a forex broker makes his money.

A pip is the smallest price increment, usually the third or fourth decimal place after the unit price. For example, a change from 1.9456 to 1.9458 is a change of two pips. The spread can be described as the difference between what is known as the asked price and paid the price, which refers to the price at which a particular currency is bought or sold at any given time. So if you’re given a quote of 1.9456 as a sale price or bid price and 1.9460 as the buy price or ask price, that is a difference of four pips or a four pips spread.

When you execute the trade, you will start off with a deficit of four pips which is the forex brokers spread. Therefore, each time you trade, you will need to make up usually between two and five pips in order to start going into profits and making money in Forex.

Some people evaluate the broker based on the spreads that they charging across a particular pair or a selection of currency pairs. It is important to check whether the spread is variable fixed because during particularly volatile times in the market, for example important economic announcements/news a variable spread will make it near to impossible to make money during these times.

A forex broker may advertise itself as being under the auspices of a large bank, institution or lending organisation. This is because of the large amounts of money that are involved in trading on the forex markets. If the forex broker is in America, the Commodity Futures Trading Commission is the regulatory body dealing with merchant registration.

The author finds that in addition to evaluating the spread offered and whether or not it is fixed or variable, bearing in mind that one should be finding trades that way outperform what is required to be spread anyway, it is useful also to test a demo account, so that the platform that the broker offers, it additional features and functions, the speed of execution and other factors can be gotten used to. Two weeks should be sufficient time to evaluate the platform.

As stated, and majority of forex brokers do not charge a commission but instead learn from buying and selling, interest on deposits, converting and holding currencies and fees for overnight rollover, i.e. they are active as currency dealers, and this is where their renumeration comes from.

The forex dealer broker acts as a middleman between the retail investor and the interbank markets. As previously stated, the spread is where the broker “makes his bones”. There is arguments amidst disgruntled forex traders on the markets that some Forex brokers are Forex scams and do not operate in a fair manner, so it is important to choose wisely.

Because Forex operates 24 hours a day, your broker should offer 24 hour telephone support. Telephone support is important because the Internet is not completely fail proof and therefore if there is a problem with either your platform or your system and you need to take action on the trade that is currently open, it’s important that you are able to use the telephone brokering to manage your trade in an emergency.

By: Sam Beatson

About the Author:

Forex knows two prices, the bid price and the ask price.

These prices don’t favor you, the trader. They favor the broker instead, because that’s how he makes his money.

The ask price is what you pay should you wish to purchase that currency pair. Using the EUR/USD as an example, let’s say you believe the EUR is going to strengthen against the U.S. dollar, meaning that the chart of the two currencies is going to go up on the graph.

In such a trade you would be purchasing the EUR  now at a lower rate (and by definition, selling the dollar) so that you can sell it later at its (hopefully) higher rate. And, since the EUR  is the base currency and it controls the direction of the trade, to purchase the EUR means to purchase the currency pair. Such a trade is called opening a long position.

The bid price is the exact opposite: it’s what you pay should you wish to sell, or short, that currency pair. To continue the example of the EUR/USD, let’s say you believe the U.S. dollar is going to strengthen against the EUR, rather than the other way around. In this trade, you would be purchasing the dollar now (and selling the EUR) in order to sell it later.

But remember, it’s the base currency that controls the direction of the trade. When you purchase the cross currency, by definition you’re selling the base; in other words, you’re selling the currency pair rather than buying it. So all the signals are reversed: the chart will go down on the graph and the price of the currency pair will decrease.

But because you sold or shorted the currency pair rather than purchased it, you want the price to decrease, because it’s the price of the base currency that’s going down while the price of the cross is going up. In our example, if you shorted the EUR/USD, you would earn a profit if the price of the pair went down.

Calculating the number of pips you earn in a short trade is the same as for a long trade. Just ignore which was the purchase or the sale price, and subtract the lower number from the higher one. The difference is the amount of your gain.

Note that the ask price is always higher than the bid. You have no choice but to buy high and sell low when trading on the Forex market.

The difference between the bid and the ask is called the spread, and that’s the amount of money the broker takes as his commission. (Yes, that’s all most brokers take. They make their profit on a large volume of trades rather than on large commissions.)

Obviously, the smaller the spread, the more money you get to keep out of what you make. Spreads are competitive among brokers, and to keep their spreads small is one means of attracting customers.

The spreads among the most popular currency pairs are generally smaller than those for pairs that aren’t as commonly traded, which is one of the best reasons for sticking with the “majors,” as they’re called.

These are the  “majors”: USD, EUR, JPY, CHF, GBP, AUD.

These six major currencies provide the bulk of all the Forex trading transactions.