This is an important question to consider when evaluating whether to sign up for a particular Forex broker in.
Not only can it impact your potential FX trading success, but it can also give you clues about how reputable the broker is.
There are certain charging practices among Forex brokers that you definitely want to avoid.
How Brokers Make Money
Before discussing how much you can expect to pay a Forex broker, let’s go over how they are supposed to make money.
Brokers give you access to the Forex markets, and usually, there are two ways that they can charge you for this service. One is through fixed commissions, and the other is through the spread.
Typically, banks charge commissions, while online brokers charge spreads.
Why is spread preferable to commissions? Well, the spread represents a difference in the buy and sell price, and in most forex operations it is really small. A fraction of a percent, in fact. This gives the Forex trader a lot more flexibility in picking their trade size because they always know at the time of trading how much it will cost.
Most importantly, the Forex broker only makes money if you trade. This means they are motivated to make sure you stick around and make money. And because the broker isn’t taking a percentage of your trading income, they have no motivation to interfere in the way you trade.
What Kind of Spreads Can You Expect?
How much the spread is, usually depends on the size of your account, and varies from broker to broker.
It also varies over time, depending on market circumstances, and how much liquidity there is. Brokers generally compete on the basis of offering smaller spreads, so there is an incentive for them to offer as low a spread is possible for their clients.
Most reputable Forex brokers who offer variable spreads automatically pass the lower spreads onto their clients in real-time.
Spreads vary between currencies, as well. The more popular – and therefore liquid – pairs typically have smaller spreads than the more exotic pairs. Pairs that have more volatility will also have larger spreads, generally.
Generally, for a small retail Forex trader with an account under $5,000, you should expect spreads of less than 2 pips for major currency pairs.
Exotic and crosses will likely have higher spreads, the less liquidity they have.
If you are a larger Forex trader, you can sign up for premium accounts that offer lower spreads, sometimes as low as 0.6 of a pip. This is more attractive for day traders, naturally, since they will be making more trades.
The Bottom Line
Reputable FX brokers will only charge spreads. Less reputable brokers usually introduce additional fees to get more money out of their customers, such as deposit and withdrawal fees, commissions, etc.
Usually, this is because they expect their customers to lose money, and not stay around for long. You’ll likely want a Forex broker that balances small spreads with good educational materials.