Beginner traders or curious ones wonder how Forex CFD brokers make profit, because they always offer their platforms without costs, without monthly fees, with live charts, a demo account, etc.
The truth is that the Forex market offers these advantages. But it’s good to know how and when brokers make profits from online trading. You can open a free demo account with IQ Option here.
Some Forex brokers apply commissions. This does not always happen, as we will see later in the case of eToro. However, commissions fall into three categories:
- Fixed Spread Commissions
- Variable Spread Commissions
- Commissions calculated on Spread Percentage
Before continuing with the explanation of these three categories of commissions, remember that the spread is the result of the difference between the purchase price and the sale price. The spread is measured in pip.
What is the best category of broker?
We should not conclude quickly that the category of fixed spread commissions is the most comfortable or convenient. We should make the choice carefully. In fact, the spread, being variable, can be much lower than the fixed spread.
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If you choose a broker with a variable spread, the spread can vary from 1 pip and go up to 7 pip on the major currency crosses. The level of market volatility is between 1 and 7 at some points.
Commission-free CFD Forex Broker
Now let’s talk about the Forex brokers that do not apply commissions, as we mentioned before. This happens when the broker gets his profit from the spread. When the trader trades, he will be confronted with a certain number of pips requested by the broker for each trade. Of course, less pip requested and more profit will result for the trader.
When choosing your broker for online Forex, you should carefully consider these factors. Generally, the least expensive brokers are those who have stable relationships with large banks or who have large cash holdings, such as eToro.
Apart from the cost of Forex brokers, we also need to mention a very technical aspect: slippage. This is a slippage in the broker’s price when there is a lack of cash in the markets or perhaps in very volatile market conditions.
The slippage occurs when the trade is executed with a different price than the one offered by the client. Consequently, more pips have to be paid compared to the average spread.
When trading short term, this can be stressful.
To better cope with this situation, it is advisable to ask the broker’s customer support service for information on how they handle market news schedules and whether they offer tips to protect the client from slippage.
Therefore, the trader may decide to trade at a fixed spread. As mentioned above, it may be higher, but orders are executed faster and at the desired price. Therefore, the fixed spread may be more comfortable.
On the other hand, if it is a variable spread system, prices may vary based on the liquidity of some currency pairs. It would be good to find a broker who allows you to choose between fixed and variable spreads, but it is especially recommended for experts.
There is one category of broker that we have not yet mentioned: ECN brokers. With these brokers you can find quite interesting conditions. They can make you pay a small commission of about 2 tenths of a pip based on the service they offer.
Therefore, this element is important if you are thinking of obtaining a very low spread when trading with large investors. In short, it creates an ideal trading environment.
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