This is a very good question, but investors don't ask it nearly enough. After all, when you first start trading Forex, there are always going to be a lot of things you don't know, and your broker seems like the best place to get good information, right? Even the idea that Forex trades are "commission free" is not true, so it is in the broker's best interest to convince any investor to trade because that is how the broker makes money.
It's true that Forex brokers don't get paid commissions like people who trade stocks or commodities do. Instead, these "middlemen of the Forex" make money from a number of things that have to do with trades, such as:
Buying and selling currency
- Interest on money put away
- Rollover fees
- Changing money and keeping it
In short, the difference between the bid price and the ask price is how the Forex broker makes money. There was a time when the only people who played in the Forex were banks, major currency dealers, and other big players. But brokers often work with or have ties to an investment bank that backs the loans that are used to make a trade possible. These brokers buy a lot ($100,000) from a bigger bank or investment vehicle and then sell it back to you at the "ask" price.
The "bid" price is how much you can get for that position if you sell it back to the broker. If the ask price of a position was 1.1920 and the bid price was 1.1923, and you sold it back to the broker right away, you would lose.0003, or three pips. Even though the broker technically didn't charge a commission, they still made those three pips from the trade. Since the average lot size on the Forex is $100,000, a trade in the above situation would cost $30.
So, if the broker makes money from trades, they will probably tell you to trade a lot. They might even tell you to set really tight stops to keep you from losing money and make more trades at the same time. Trading on the Forex too often isn't a good idea anyway, because price trends on the Forex tend to be long-term and stable. When you trade based on news releases and make more trades, you are more likely to lose money.
Even though a broker makes money from trades, that doesn't mean they will give you bad information. Most brokers have a good reputation and can give you good advice on how to invest. But before jumping in with both feet, you should learn about the market and maybe start with "mini-lots" or even paper accounts. To be successful at Forex trading, you will need a good investment plan, patience, and a lot of backtesting.
