Why does the Forex sound an alarm for loss? Is this such a dangerous place that always brings failure? The greatest risk you ever face is not the forex but lack of knowledge, due to which 90% of traders lose their 100% savings.
In forex, the pricing model is very important because when a trader enters the trading desk he comes to know two pricing models, the spread and commission.
Is the spread the same as the commission?
No, they are not the same. Spreads are the difference between asked and bid price for providing transactions easily, while the commission is the broker fee in different forms, like fixed, variable, and percentage on the volume of trade. But if we take it in terms of the fee that the trader has to pay the broker, both are the same.
Commission can be estimated as a pure spread. But commissions are also assessed in addition to spread.
Forex commission is often connected with spread (but not always). It is very important to carefully check both spread and commission to keep broker payments from consuming up your profit.
If you want to understand spreads and commissions we define and compare them for your convenience.
Let’s start; stay with us till the end.
What is spread
Spread in terms of finance is the difference between two similar measurements like the price of a stock. This profit is called the spread if one sells an asset at a higher price than buying it.
It can also be defined as the difference between asked price and the bid price.
In banking, world spread is the difference between the interest rate a bank charges a borrower and the interest rate a bank pays a depositor.
In forex, the spread is the difference between the bid and the asking prices. If you open your trading platform, there is always a difference between the selling price and the buy price of the currency pair.
You only pay the spread for one total trade.
Major pairs which traded heavily have a small spread, while more unfamiliar pairs show a big spread.
What Does Spread Mean in Trade
A spread trade is an act of purchasing one security and selling another related security as a unit. A spread trade is usually made in options trade and futures contracts.
Type of Spread
How the spread plays a role in earning money can be explained if we have clear concepts about its types. There are two basic types of spread:
The fixed spreads stay the same however, what is the market condition at a given time.
This is offered by brokers that work as the ‘’market maker’’.
Variable Spread (Floating Spreads)
Variable spreads are constantly changing. With this, the difference between the asked and bid prices is frequently altered.
Brokers have no control over it, and the spread may be tightened or widened.
Zero Spread Accounts
These are trading accounts offered by brokers with no difference between asked price and the bid price or spreads that the average is near zero.
What is commission
A commission is a fee delivered to a person who makes a sale. It is usually a percentage of the selling price. This percentage is called the commission rate.
In forex, it is a fee charged by brokers on different types of accounts. Brokers have a fee schedule, including trading fees or non-trading fees.
If the trader deals with the zero-spread or very low spread but has ECN (electronic communication network) he always has some sort of commission. This type of fee is preferred by traders who are working in low liquidity. This commission often protects traders from, slippage, requotes, and widespread.
There are three types of commission
A fixed commission is sticking to the degree of the spread between two pairs that you are trading.
A variable commission is tied to the amount spread between two currencies in a given pair.
It is set by the broker and sticks to the degree of spread. But this is a smaller amount. That is the percentage of the actual degree of spread.
What is the difference between Spread and Commission
Commission and spreading both are pricing methods chosen by brokers. These methods describe how brokers charge you and provide you with the best option in trading.
An STP broker (straight through processes) carries your trade and processes it through his bank or liquidity provider group. The bank sends back the price. The broker adds the real amount and profit from the spread, he charges the trader.
In this process, you have the choice to not pay the commission and pay a slightly higher spread.
If you have to pay commission, pay a lower spread.
Spread is only once to pay but in commission, you have to pay when you enter and then leave the trade.
Commission amount is fixed or tried to fix in percentage but the spread may be small depending upon the pair you trade or the fluctuation of currency value.
Spread is more transparent than commission.
Which is Better, Commission or Spreads
If we compare the spreads and commission, we come to know that spreads are more transparent and easily affordable if it is tight. The best spread would be starting from 0 pips and the best commission would be zero. But there is no broker who offers you zero commission. So find a broker with a low commission rate.
What Is Good Spread in Forex
In the case of high spreads, the market is highly volatile and liquidity is lower. But if the spread is the lower market is stable and affordable. liquidity, in this case, is higher so in forex low spreads are better than high spreads.
Frequently Asked Question
How Much Is Commission in Forex?
A broker typically charges typically 1$ per $100,000 currency bought or sold. If a trader trade1,000,000 EUR/USD the broker gets 10$ and if the trader buys 10,000,000 the broker receives 100$ commission.
How to Avoid Spread in Forex?
If you avoid losing in forex, avoid high spreads. To reduce spreads, some measures should be adopted. This will increase your profit and make it easy to survive in the forex market:
- Choose high-liquidity pairs
- Choose the perfect time of the day
- Avoid news trading
What is slippage?
A term often used for traders who expected a different price is:
Slippage is the difference between the expected price of an order and the price when the order is actually executed.
Selecting a good broker is not an easy task. This is the most crucial step in paying the lowest spread. Brokers offer a variety of spreads to attract the attention of new traders. If they allow zero spread, there must be some commission. Brokers may charge an extra fee for using the platform, providing extra education, and offering access to a human financial planner (non-trading fees or commissions) are different forms of commissions.
So, you should understand spread is more transparent and pays once on a single lot, while the commission is a fee charged on both the entry and exit of the trade.
Be aware and do your homework within the brokerage, and don’t be deceived by the very small spread that charges you a very high commission.
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