One of the best things about trading on the Forex is that you don't have to pay a fee for each trade. Even though we'd all like to think that Forex brokers are just out there making trades for fun, the truth is that they, like everyone else, need to make money. Even though they don't charge traditional commissions, Forex brokers still make money when trades happen. Brokers are paid in a number of different ways, including:
Buying and Selling Currency
- Got interest on the money I put in.
- Rollover fees
- Changing money and keeping it
Most of the money that brokers make comes from buying and selling currencies. This money comes from the "spread," which is the difference between the asking price and the bidding price of a currency pair. The "ask" is the price a regular Forex trader would pay for a position. The "bid" price is the price at which an investor could sell the position.
In Forex trading, a pip is the smallest unit of measure, and it is equal to.0001 (except for the Japanese Yen, which is .01). Most of the time, the difference between the ask price and the bid price is only 3 or 4 pips, and this is what the broker makes when they buy and sell currencies.
A broker is actually a middleman, and no one ever pays them directly. Instead, a broker buys a position from a larger investment institution and then sells it to a retail Forex trader, keeping the difference between the two prices. A broker might set the "ask" price at 1.250 and the "bid" price at 1.246, for example. If the investor sold the position right away, they could only get the "bid" price of 1.246, which is a loss of 4 pips. Since most Forex transactions are done in $100,000 lots, that means that the broker made $40 on that currency exchange.
The spread will be different for each broker and each pair of currencies. On average, the spread is between 3 and 5 pips. Brokers are a necessary part of Forex trading, if only because the transactions are so big. Every day, about 1.8 trillion dollars are traded on the Forex. These deals are made in "lots" of $100,000, but there are also $10,000 "mini-lots" and even "micro-lots." So, it is common for Forex trades to be highly leveraged, with most traders putting up only $1,000 (or 1/100) of the total capital.
Most Forex brokers work with investment banks and other similar institutions as partners or in some other way. These "backers" actually guarantee the loans that are used to leverage Forex trades. Without them, none of us could trade on the currency markets unless we were willing to risk more than the 1 percent that most brokers require.
Yes, brokers make money when people trade on the Forex, but they also do a good job. Just be careful not to trade too often, because even though the pips are small, they can go away quickly if investors try to make up for a loss by investing again without doing their homework. So, be wary of any Forex broker who recommends "day trading" or something similar. This is a very, very risky way to trade in the most volatile and fluid market the world has ever seen.
