What Is Commission In Forex Trading? | Full Details

In this lesson we will answer the question, what is commission in forex trading?. Also,  after this class we will cover topics such as “what a swap means in forex”, what leverage means in forex and you’ll get to know what it means when we talk of margin in forex trading. 

When it comes to doing business regardless of the kind of business, it is very important to understand every aspect of it. You cannot be successful in any business if you do not know how much money you need to invest and why you need to invest that amount of money.

In business, you have to keep account of every single penny you have invested and it’s importance. Forex trading is also a business and every penny matters.

Many forex traders don’t give much importance to the commissions they have to give on every trade.

This could be because they do not know or have any idea how important it is to manage the commissions. Trust me, it’s very important to keep commissions under considerate conditions while placing a trade.

In this lesson, we will learn every single detail about what commission is in forex. Let us start by understand what commission is in forex trading

What Is Commission In Forex Trading?

Whenever you buy anything on Amazon.com, they include fees, or if you buy anything at Walmart, they have the commission included on every product. The big question is, why do they do so?

Yes, these are businesses and to run a business you’ll need to earn money through the services you provide. This is the same thing that happens when you buy and sell currencies in the forex market. 

You do that with a broker and this broker provides you with different services and even allows you to trade from anywhere around the world just from your laptop or a smart phone.

When they provide you with these great services, isn’t it obvious that they will need money to keep their business running?

In the end, it is business not a charity. The broker charges you with a transaction fee whenever you open a trade and that fee is called a commission. The more you trade, the more money your forex broker makes.

When you first step your foot into forex trading, finding a reliable trading broker to open an account, you will see a lot of brokers claiming to give you zero commission accounts. This will make you wonder why a broker doesn’t want to charge any commission.

This will also make you think that the broker is not regulated and it’s going to scare you. Well, they are not going to scam you. Regulated brokers do provide a zero commission account, but there is a catch in it.

There are different ways that brokers charge you commissions. Let us try to know how brokers charge commissions. 

How Brokers Charge Commissions

There are two direct ways that a broker charges commissions from you, the first one is through normal commissions and the second is through spread commissions.

When you first open a trade, either you buy or sell, the first thing that the broker will charge you is the commission for the transaction you just made.

It is very important to know that the commission is first deducted from your equity and not from your balance

The reason I’m telling you this is because it has a physiological effect on the way you take your next trade. Every broker has its commission charges mentioned on their official websites. These commission charges are based on the number of units you buy or sell.

The commission mentioned on the website are just based on 100,000 units and they vary from lot size to lot size. These commissions can vary anywhere between $0.50 to $7 or even more because it solely depends on the broker you are using. 

Also, brokers charge you commissions through spreads. The moment you enter a trade, either a buy or a sell, your trade is always moved a few pips above or below your level. This is the reason you always see your trade in a loss whenever you open it. 

Your broker charges you with some amount of spread. And this spread is nothing but the difference between the asking price and the biding price. Note that different brokers provide different spreads and based on that, your commission is calculated.

For example, let us consider your broker provides a spread of 1 pip on USD/JPY. So when you buy 100,000 units (1.0 lots) you’ll instantly see a loss of $10. This $10 is the commission that they charge from you via spread.

And no matter the outcome of your trade, it will be charged from you when you finally close the trade. The type of commission charged via spreads differ considering the currency pair you are trading. 

This is because different currency pairs have different spreads and it also varies by the lot size you are using. With that in mind, when you see a broker claim a zero commission account, this means that they won’t be charging you with the direct commission. But they will charge you based on the spread 

I hope you understood the concept of commission as we answered the question: what is commission in forex trading? clearly and I will see you in the next class

If you missed our previous lesson, you can have a link to that below as well as a link to the full course in case you just hop on any article midway.

Going through this course from the beginning will help you get a better understanding and also be equipped as a beginner trader. 

Next Class: 

Previous Class: Forex Trading Essentials | What You Need To Get Started

Full Course: Forex for beginners