The novice trader or curious user might wonder how Forex CFD brokers earn income if their proposals feature zero costs, zero fees, real-time charts, a demo account, no commissions, and so on.
The currency market or Forex truly offers these convenient conditions, but it is good to know how and when brokers profit from the operations performed during online trading.
Commissions on Forex
Some Forex brokers usually apply commissions. This isn’t always the case, as we will discover later on Plus500. In any case, commissions are divided into three types:
- Fixed spread fees
- Variable spread fees
- Commissions calculated on a percentage of spreads
Before proceeding with the explanation of each of the three types, remember that the spread (the famous “differential”) is given by the difference between the purchase price and the selling price. The spread is measured in pip.
Which is the best type of broker?
Among the types reported, fixed spread commissions may seem the most comfortable or convenient at first glance, but as for mortgages (forgive the comparison), the choice must be carefully evaluated. In fact, the variable spread, being variable, can reach much lower rates than those of the fixed spread.
In the event that you choose a broker who charges using variable spread, you can predict a spread that can vary from 1 pip up to 7 pip on the major currency pairs. Between 1 and 7 there is the level of market volatility at any given time.
Forex CFD Broker without Commissions
We now come to the section about Forex brokers who do not apply commissions of any kind. This occurs when a broker derives his profit from the spread. When the trader operates, he will have to deal with a certain number of pips required by the broker for each transaction. Obviously, the less the required pip is, the higher the earnings will be for the trader. When choosing your online Forex broker, consider this factor carefully. Usually, the most convenient brokers are those that have solid relationships with large foreign exchange banks and who have great liquidity, perhaps because they are listed on the stock exchange, like Plus500 on the London Stock Exchange.
Regarding costs of CFD brokers, it is imperative to mention a very technical aspect called “slippage” or “requote”. This is slippage on the price made by the broker when there are lack of liquidity situations in the markets or in very volatile market conditions.
The slippage or requote occurs when the operation is performed at a price different from that offered by the customer, so more pip is paid in comparison to the average spread. When trading very short term and with an eye on financial news, it is a cost that can be annoying to sustain.
To better deal with this issue, it is best to ask the broker’s assistance service for information on how to manage the timing of market news and if, in such cases, it offers advice to protect its traders from slippage.
For this very reason, you can decide to complete transactions with a fixed spread. As highlighted above, this may be higher but there is an immediate execution of orders at the price you decide. In short, a fixed spread is definitely more convenient.
When there is a dynamic system of spread, however, prices may vary depending on the liquidity of some currency pairs. It is optimal to find a broker that allows you to choose between fixed and variable spreads, but as you have already guessed, this choice is for experts.
Just as we detailed in the article dedicated to the types of brokers, there are categories called ECN. You can find a fairly interesting condition in ECN brokers. They can charge a small commission around 2 tenths of a pip according to the services offered by said broker, such as the transmission of orders to a large market maker conglomerate. This factor is important when considering the possibility of obtaining very thin spreads when working with large investors. In short, a very convenient bargaining environment is created.
Go to lesson 6 – CFD charts