Forex Trading Costs and Fees Explained

Forex world is full of competition, whether it is between currencies, forex traders or forex brokers. Today there are many brokers available online and most of them scream “No Fees, No Extra Charges” on their websites, banners or reviews. It is an amazing, but rather exotic offer. Trading without any strings attached would have been bliss, however in reality nothing comes for free, especially not in the investing markets. So what is really going on when it comes to forex broker’s charges? 

All Forex Brokers Have Fees

Forex brokers are getting rewarded for their services in 3 ways. Let’s review these options:  

  • fixed spreads
  • variable spread
  • commission based on a percentage of the spread 

The spread is the difference between the two prices: the bid price (the rate at which you can sell the currency) and the ask price (the rate at which you can buy the currency). 

Fixed spreads sound like a very attractive offer. We all hate dealing with any kind of changes and we like to see fixed prices (especially when we buy something regularly!). The acceptable bid/ask spread for major currency pairs such as EUR/USD is 3 pips, but it is possible to find a lower option.However, in forex market fixed spreads might be less profitable. After all, it is a volatile market and you better get used to changes! 

In the case of a variable spread, you can see spreads might go as low as 1.5 pips or as high as 7 pips. It all depends on the currency pair you have selected and the market volatility.  

Then we have forex brokers that take commissions for each trade. This is done because your order goes to a large market maker with whom your forex broker has a partnership. In this case you get the lowest spread available in the market. 

Apart from spreads and commissions, forex traders are usually charged for rollover. Rollover fee is charged by a forex broker in order to continue your order over the end of a trading day into the start of the next day. 

Come to think of it, almost any “special service” provided by forex brokers will cost money. You are most likely be charged for statements, order cancellation, account transfer or telephone order. Let’s not forget the bank-related fees. Whether it is a withdrawal, deposit or a returned check, you might be subject to an extra charge. 

I have also come across forex brokers that charge a monthly account maintenance fee whenever the account is inactive for more than 3 months.  

Another forex brokers charge a so-called ticket fee threshold. If you trade less than minimum amount required, a fee is added to cover the administration costs.  

The forex brokers earn an income by matching buy and sell orders and execute them on the interbank market. Forex brokers typically make money through the bid-ask spread cost (fixed or variable), commissions, rollover fees (also known as the overnight swap rate) and other alternative sources, including:

  • Payment processing commission
  • VPN fees
  • Third-party tools
  • Risk management tools (guaranteed stop-loss orders)
  • Trading volume fees
  • Inactivity fees

The cost of trading forex varies from broker to broker. The typical trading cost varies from $0.9 to $3.0 per one standard lot or up to $6.0 round-trip spread costs. More, to access interbank spreads (the raw spread account) FX brokers are going to charge an additional commission that can vary from $2 per side ($4 round-turn commission) and can go as high as $5 per $100,000 units traded.

If you hold your position overnight, then the broker will charge you swap fees. In the forex market, all currencies have interest rates set at the interbank level and these costs are passed onto you when you have an open position once the market has closed. This will usually be 5 pm New York time. This charge is known as swap fees, which are sometimes called overnight interest rates or rolling costs.

The overnight interest is the difference between the interest rates of the two currencies that make your pair. This means your swaps could be an expense or a source of revenue, depending on if the difference in interest between the pair is positive or negative. When choosing a broker, you may want to check the broker is passing on the swaps, as some untrustworthy brokers may keep your swaps when these costs are positive for you.

What Kind of Spreads Can You Expect?

How much the spread is, usually depends on the size of your account, and varies from broker to broker.

It also varies over time, depending on market circumstances, and how much liquidity there is. Brokers generally compete on the basis of offering smaller spreads, so there is an incentive for them to offer as low a spread is possible for their clients.

Most reputable Forex brokers who offer variable spreads automatically pass the lower spreads onto their clients in real-time.

Spreads vary between currencies, as well. The more popular – and therefore liquid – pairs typically have smaller spreads than the more exotic pairs. Pairs that have more volatility will also have larger spreads, generally.

Swap costs will increase the larger your position is and the more leverage you use. This is because swaps are percentage-based.

Calculating Swaps

When swaps are costs

  • If you trade AUD/USD and the overnight interest of AUD set by Interbank is 6% and overnight interest for USD is 4% then you would be charged 2% rollover fee.

When swaps are revenue

  • If you trade AUD/USD and the overnight interest of AUD set by Interbank is 4% and overnight interest for USD is 6% then you would earn 2% in paid rollover fees

Indirect Costs

Spreads costs, commission fees, swap rates, administration charges (for Islamic accounts) are considered direct costs as these are costs are directly tied to your trading activities. These costs are unavoidable. Trading may also result in indirect costs and sometimes called hidden fees. These costs are usually avoidable unless your action or inaction makes these costs necessary.

Inactivity Fees

Many brokers implement an inactivity fee when there is no trading activity on your account for a certain period of time or have not met minimum trading volume each month, quarter or year.

While most (but not all) brokers only activate inactivity charges when you have not traded for long periods of time, most charge the inactivity fees on a monthly basis so this can add up.  If you are not an active trader and tend to leave your account dormant for long periods, then a broker with no inactivity fees might be an important consideration.

What Is The Rollover Rate?

Forex positions kept open overnight incur an extra fee. This fee results from the extension of the open position at the end of the day, without settling. The rollover rate results from the difference between the interest rates of the two currencies. The first of the pair is the base currency, while the second is the quote currency.

To summarize, when it comes to forex brokers, make your choice wisely and slowly, pay attention to the smallest details in the trading policy and go over the spreads for major currencies (it is usually listed on the site and is subject to change without prior notice!) And keep in mind that there is always something to pay for. In my opinion, there is no such thing as “No Fees, No Extra Charges”. After all, forex brokers always earn a spread!

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