The forex market is conveniently becoming one of the more popular markets for trading.
Not just will be the experienced traders seeking to the forex market to maximise their trading returns, but some new, individual investors are now able to trade the Forex market — just as they do stocks and futures.
Increasingly more people are seeing Forex not just as an alternative way to diversify their portfolio, but they are also finding that it really is becoming the absolute most profitable component of these investments.
And that’s due to the several advantages Forex offers over other markets like stocks or commodities. Some tips about what you may typically see promoted about Forex:
— Unparallelled liquidity. This is the largest financial market on the planet by far. Almost $2 trillion being traded daily!
— Excellent leverage potential. Individual investors get access to leverage of 100:1 and even 200:1
— No Commissions (more on this down the road)
— Low trading costs.
And yes, the Forex market does indeed offer all of these advantages.
But the last two points above talk about costs, and that’s what we’d prefer to concentrate on in this article.
Like most trading, there are costs involved, and, while these could be much lower than they was once, you will need to understand what those are.
Let’s start by looking at trading and investing, something that most of us investors are pretty knowledgeable about.
When trading stocks, most investors may have a trading account with an agent somewhere and can have investment funds deposited in that account.
The broker will likely then execute the trades on the behalf of the account holder, not to mention, in substitution for providing that service, the broker will want to be compensated.
With stocks, typically, the broker will earn a commission for executing the trade. They will charge either a fixed dollar amount per trade, or a buck amount per share, or (most often) a scaled commission based on what size your trade is.
And, they’re going to charge it on both sides associated with the transaction. In other words, when you buy the stock you receive charged commission, after which when you sell that same stock you can get charged another commission.
With Forex trading, the brokers constantly advertise “no commission”. And, needless to say that’s true — with the exception of a few brokers, that do charge a commission much like stocks.
But also, needless to say, the brokers aren’t performing their trading services for free. They too make money.
The direction they accomplish that is through charging the investor a “spread”. Simply put, the spread is the distinction between the bid price and the ask price when it comes to currency being traded.
The broker will add this spread onto the price of the trade and ensure that it stays as their fee for trading.
So, while it isn’t a commission per se, it behaves in practically the same way. It is just a little more hidden.
The nice news though is the fact that typically this spread is only charged using one side of the transaction. Put differently, you do not pay the spread when you buy after which again whenever you sell. It really is usually only charged on the “buy” region of the trades.
So the spread really is most of your cost of trading the Forex and you ought to focus on the main points of what the different brokers offer.
The spreads offered can vary pretty dramatically from broker to broker. And while may possibly not look like a lot of an improvement to be trading with a 5 pip spread vs a 4 pip spread, it really can add up very quickly when you multiply it out by how many trades you create and just how much money you are trading. Think about it, 4 pips vs 5 pips is a positive change of 25% on the trading costs.
One other thing to identify is the fact that spreads may differ according to what currencies you’re trading and what sort of account you open.
Most brokers provides you with different spreads for different currencies. The preferred currency pairs such as the EURUSD or GBPUSD will routinely have the best spreads, while currencies which have less demand is going to be traded with higher spreads.
Make sure to considercarefully what currencies you will be most likely to be trading and discover exacltly what the spreads will likely to be for the people currencies.
Also, some brokers will offer you different spreads for different sorts of accounts. A mini account, for example could be at the mercy of higher spreads than the full contract account.
And finally, considering that the spreads actually are the essential difference between bid prices and inquire prices as based on the free market, it’s important to observe that they are not “guaranteed”. Most brokers will say to you that there may be times during periods of low demand, or very active trading when the spreads widen and you’ll be charged that wider spread.
These do are generally rarer situations due to the fact foreign exchange in fact is so large and demand and provide are usually quite predictable, nevertheless they do occur, especially with some associated with the lesser traded currencies. Therefore it is vital that you be aware of that.
In conclusion then, when trading Forex, understand that the “spread” is really your most significant consideration for trading costs.
Spreads can differ significantly between brokers, account types and currencies traded. And small variations in the spread really can soon add up to 1000s of dollars in trading costs over even just a few months.
So be sure to know very well what currencies you are going to be trading, how frequently, and in what sort of account and use those factors to help decide which broker can provide the finest trading costs.