Choosing brokers is sometimes about commission or spread. It's not as simple as which one is cheaper but rather which is more sensible to you.
Today, there are thousands of forex brokers available on the market, and each comes with different rules, benefits, as well as risks. Regarding trading fees, most brokers will make you choose between spread and commission.
If you choose to pay spread only, you won't have to pay any commission, but the spreads are usually higher. On the other hand, if you choose commission, you will have to pay a fixed commission on every trade, but the spreads are significantly lower.
Some traders may question which is preferable between spreads and commissions. Well, to put it simply, spreads could be good for traders who want no restrictions in their position sizes, while commissions are better for scalpers who like to open small trades.
Why Spread Is Better for Regular Traders
Spread is the difference between a specific asset's bid and ask prices. The bid price is the price you will earn from selling a currency, whereas the asking price is the price you must pay to buy a currency.
Spread can be good for regular traders because it is charged once per trade. That means traders do not have to be charged for each lot they are taking, allowing them to choose whichever lot they want.
Nonetheless, the actual amount of the spread may vary depending on the asset that you are trading. Major currency pairs that are heavily traded typically have smaller spreads, while exotic pairs have much larger spreads. Also, note that spreads can suddenly increase during essential news announcements and huge market swings.
Nowadays, traders can count the spread easily with a spread calculator. But, for a better understanding here is how spread works
Let's say the trader is taking a position in GBP/USD. When trading, the bid price is 1.1000 and the ask price is 1.1005. Then, cost of the spread would be:
Spread = Ask Price – Bid Price
= 1.1005 – 1.1000
= 0.0005 pips
Why Commission Is Better for Scalpers
Commissions in forex brokers are typically charged alongside low spreads. Note that the spreads charged in this condition are usually very low and can be called raw, tight, or even zero spreads. If the regular spread is around 1 pips, then raw spreads that come with a commission could be around 0.1 pips. Thus, some may think that commission is a form of compensation for the spread decrease.
The catch is, forex brokers' commission is counted per transaction size. It could be $3 per 1 standard lot or $2 per 1 mini lot. This surely restricts most traders from experimenting with their lot sizes.
For a better understanding, here is how a commission fee is charged.
Let's say the broker charge a commission of $7 per lot traded. If a trader chooses to open 1 lot (100,000 units), the commission charged would be $7. However, if the investor trades 0.1 lot (10,000 units), the commission charged would be $0.7.
Therefore, commissions could very well benefit scalpers who trade in small sizes. Additionally, the low spreads accompanying commissions are a good match for scalpers since accumulating high spreads can damage their risk management.
That being said, traders still need to pay for the spread in addition to the commission, albeit lower than a standard account.
Bottom Line
For a better understanding of spread and commission, check out this table comparison below.
| 💸Trading Costs | ✔️Pros | ❌Cons |
| 🔢Spread only |
|
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| 💰Commission (+ Spread) |
|
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The comparison above clearly describes how spreads could reach more types of traders, from beginners to experts who tend to explore their trade sizes. That is because spread-only ensures no extra cost, and it's only charged once you open a trade. Also, the spread amount would not be multiplied by the trading lot.
On the other hand, commission may be better for scalpers requiring extremely low spreads. They also tend to open in smaller transaction sizes, for their purpose is to accumulate profits from small but frequent trading positions.
15 Comments
Nov 9 2022
It is normal if brokers generate cash from spread and commisions. For me it could be signal that brokers want positive cashflow and profit so that it will survive in the market. What I dislike is sometimes brokers don'tinform precisely approximately prices in trading.Hey guys, cmon, you shouldinform us the fee prices and the reason of the prices. As buyers and traders that use your service, we understand that taking charge due to the fact you need your corporation in order to survived. If I pick among commision or spread. I pick spread due to the fact I dont need to look many minus in my financial report sheet. Just take it as Spread, and I recognize after I open position, I pay agents charge due to the fact I dont trade in an excessive amount of and it's going to make me dont pay so much u money into broker. If I trade more of course I will pay more for using your service.
Dec 17 2022
Raphael: I have a different opinion from you, I myself started as a beginner and chose a broker with a reasonable commission, like around $ 6 to $ 10 per lot and offered zero spread. And it's not my fault because everyone who has experience trading goes through the beginners phase too. With not much capital, you tend to be careful using your initial resources. And also as far as I know, even if a trader chooses zero spread, it's not constant in the range of 0 pips, it will always change according to fluctuations in currency prices. In fact, yes, the spread is in the range of 0.1 pips, 0.5 pis can be included in the zero spread class.
Jan 9 2023
Dec 17 2022
Friends.... I'm confused, because now there are more and more forex brokers, there are lots of them competing to provide trading offers at low costs, such as low spreads, then also low commissions but decent spreads and much more. That's what makes me confused, So, I've been curious about one of these brokers, according to your experience, those of you who have been involved in the brokerage world, if the broker provides a free spread service, yes, the commission for the broker is $ 20 per lot, is that reasonable or too expensive? ? please explain, guys
Dec 17 2022
John william: Of course, every broker is looking for profits. One of these plays on spreads and commissions from us traders. and that's reasonable considering they also need to spend a lot of capital to become a broker such as permits, infrastructure and so on and it's definitely not cheap. But yes, you as a trader also have your own interests, namely to make a profit from trading, and avoid brokers with costs that are too high. In my opinion, brokers offering commissions of around $20 per lot, for Euro/USD, AUD/USD, major forex are too expensive, right... because normally the commission is around $7 per lot. Even though the broker here offers zero spread for you, with an expensive commission like this, it's less profitable for you.
Jan 9 2023
Dec 18 2022
When starting Forex trading, the first thing you will observe here is that there are no explicit fees that the broker can charge you from (unless you start using an ECN account). You will often come across the phrase "no fees and no commissions" in any Forex related advertisement. It is a fact that brokers cannot operate without income, and because of this, most Forex traders have to pay a certain amount of spread on every trade. On the other hand, trading volume-dependent commissions can be used by any broker if their function model consists of zero spreads or raw spreads. You will basically find three types of fees that are common in online FX trading: variable spreads, fixed spreads, plus commissions.
Jan 9 2023
Jan 9 2023
Dec 18 2022
The best spreads of course start from 0.0 pips. And also very rarely a spread that is 0.0 pips can be 0.1 pips, 0.2 pips or even more. and the best commission is zero. But ideally no broker would offer zero commissions. However, there are some good brokers with low commission rates. If I were a trader with little capital, which forex broker do you think I should choose? Which has 2-3 spreads and $7 commission per lot or others with 22-25 spreads and no commissions? thanks in advance for the explanation
Dec 18 2022
Dec 18 2022
The best spreads of course start from 0.0 pips. And also very rarely a spread that is 0.0 pips can be 0.1 pips, 0.2 pips or even more. and the best commission is zero. But ideally no broker would offer zero commissions. However, there are some good brokers with low commission rates. If I were a trader with little capital, which forex broker do you think I should choose? Which has 2-3 spreads and $7 commission per lot or others with 22-25 spreads and no commissions? thanks in advance for the explanation
Jan 9 2023
If you are short on funds, I think you should open a mini or micro account. This is because it depends on how much spread you get in dollars depending on which account you trade with. For example, a standard account charges 0.2 pips for each open position. Those 0.2 pips could be $0.2. On the other hand, if you start trading with a mini account, you will be charged 0.2 pips, but you will only pay $0.02 USD. What about commissions? It is calculated based on lots and is not affected by the kind of the account. So who do you want to do trade with? Commission or spread? Actually, It depends on your trading method and not depend on your funds. For scalpers or day traders who need to open many positions in one session or day. Lower spreads are required to trade it. Imagine opening 10 positions a day with a 1 pip spread. You have to pay $10. In the other hand, if you have only 0.1 pips, you will only be charged $1! On the other hand, for a swing trader, who only opens a position once or twice, but with a larger trade size, such as 1 lot or 0.5 lots. Of course, choosing lower spreads usually results in higher commissions, so you should choose lower commissions with larger spread. Usually, the brokers charge a large spread But it give you a commission lower than just $1. For example, trading 1 lot with a low spread will incur a commission of $10. So, if you are trading with small spreads, you will have to pay $10 + $0.2 pip for example But if you trade with low commission and larger spread, For example, you only get $3 pips + $2 fee will be charged. Just pay $5! So it depends on the trading method you use.
Apr 19 2024
The spread, which can incur minimal charges, appears quite unpredictable. The article highlights that the actual spread amount may fluctuate depending on the asset being traded. Major currency pairs, with high trading volumes, usually feature narrower spreads, whereas exotic pairs tend to exhibit significantly wider spreads. It's worth noting that spreads can unexpectedly widen during important news releases and significant market movements.
Now, onto the question: What exactly are exotic pairs, and why do they tend to have much larger spreads? Thank you for clarifying this matter!
Apr 23 2024
Allow me to elaborate on exotic pairs. These currency pairs consist of one major currency and one currency from a smaller or emerging economy. Unlike major currency pairs such as EUR/USD or USD/JPY, exotic pairs are traded less frequently. This lower trading frequency often results in wider spreads, primarily because the currencies involved come from economies with lower liquidity and trading volumes.
For instance, let's take the USD/TRY pair, which involves the US dollar and the Turkish lira. The Turkish lira isn't as actively traded or as liquid as major currencies like the US dollar or euro. Consequently, trading USD/TRY typically incurs wider spreads compared to major pairs such as EUR/USD. These wider spreads are indicative of the increased risk associated with trading exotic pairs. With lower liquidity in these markets, traders may encounter greater difficulty in executing trades at desired prices, leading to wider spreads. (read more : Guide to Trading with Forex Exotic Pairs if you interested in exotic pairs)