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.
13 Comments
Raphael
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.
Glenn
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.
Jonathan
Jan 9 2023
John william
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
Patricia
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.
Yudha
Jan 9 2023
Cecilia
Dec 18 2022
Joshua
Jan 9 2023
Yoga
Jan 9 2023
Krish
Dec 18 2022
Georgino
Dec 18 2022
Krish
Dec 18 2022
Merlin
Jan 9 2023