Forex trading is a lucrative business that has attracted many investors with the promise of high returns. However, before diving into the world of forex trading, investors need to understand how commission is calculated in forex. Commission is an important aspect of forex trading, as it directly impacts the profits earned by investors. In this article, we will explain how commission is calculated in forex.
What is Commission in Forex Trading?
Commission in forex trading is the fee that a broker charges for executing a trade on behalf of an investor. Forex brokers earn their revenue by charging a commission on each trade executed by their clients. The commission charged by brokers varies depending on the broker, the trading platform, and the type of account held by the investor.
How is Commission Calculated in Forex Trading?
Commission in forex trading is calculated in two ways, depending on the type of account held by the investor.
1. Fixed Spread Account
In a fixed spread account, the commission charged by the broker is included in the spread. The spread is the difference between the buy and sell price of a currency pair. The broker adds a certain amount of pips to the spread to cover their commission. For example, if the spread for EUR/USD is 1.2 pips, and the broker charges a commission of 0.5 pips, the total spread for the trade would be 1.7 pips.
In a fixed spread account, the commission charged by the broker is always the same, regardless of the size of the trade. For example, if the commission charged by the broker is 0.5 pips, and an investor executes a trade of 1 lot (100,000 units), the commission charged would be $5. However, if the investor executes a trade of 0.1 lot (10,000 units), the commission charged would be $0.5.
2. Variable Spread Account
In a variable spread account, the commission charged by the broker is separate from the spread. The broker charges a fixed amount of commission per lot traded. For example, if the broker charges a commission of $7 per lot traded, and an investor executes a trade of 1 lot (100,000 units), the commission charged would be $7. However, if the investor executes a trade of 0.1 lot (10,000 units), the commission charged would be $0.7.
In a variable spread account, the spread charged by the broker varies depending on market conditions. The spread is usually wider during volatile market conditions and narrower during calm market conditions. The commission charged by the broker remains the same regardless of market conditions.
Factors Affecting Commission in Forex Trading
There are several factors that can affect the commission charged by brokers in forex trading:
1. Broker Type
The type of broker can affect the commission charged. Full-service brokers usually charge higher commissions than discount brokers. Full-service brokers provide additional services such as research and analysis, while discount brokers provide only the basic trading platform.
2. Trading Platform
The trading platform can also affect the commission charged. Some platforms charge a higher commission than others. Investors should choose a platform that offers competitive commissions and suits their trading style.
3. Account Type
The type of account held by the investor can also affect the commission charged. Fixed spread accounts usually have lower commissions than variable spread accounts. However, fixed spread accounts may have wider spreads, which can offset the lower commission.
4. Trading Volume
The trading volume can also affect the commission charged. Brokers usually offer lower commissions for high trading volumes. Investors should choose a broker that offers volume-based discounts.
Conclusion
Commission is an important aspect of forex trading, as it directly impacts the profits earned by investors. Commission in forex trading is calculated in two ways, depending on the type of account held by the investor. In a fixed spread account, the commission charged by the broker is included in the spread. In a variable spread account, the commission charged by the broker is separate from the spread. There are several factors that can affect the commission charged by brokers in forex trading, including broker type, trading platform, account type, and trading volume. Investors should choose a broker that offers competitive commissions and suits their trading style.
