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.
For a better understanding of spread and commission, check out this table comparison below.
|💰Commission (+ Spread)
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.