The forex industry likes to point out that most forex brokers don’t charge commissions. It’s true you won’t see a commission charge added on when you buy or sell currency. Although there are some exceptions, the fees (or commissions, if you prefer) are built into the pricing system used in forex trading and are based on the difference between bid and ask prices (called the spread). Prices are stated in terms of the “pip,” which is the smallest amount a currency exchange rate can change by.
Learn how forex prices work. Currencies trade in pairs. The exchange rate tells you how much of one currency is required to buy one unit of the other. For example, if the euro and US dollar are quoted at EUR/USD = 1.2500, you need $1.2500 to buy one euro. The quote is to four decimal places because the pip for the US dollar is $0.0001 (1/100 cent). Forex brokers set their fees in terms of pips.
Look at the exchange rate quoted for a currency pair. You will see two prices listed. The bid is the price the broker will pay you for a currency and the ask is the price at which the broker will sell you the currency. Note that the ask is always a few pips higher than the bid.
Subtract the bid price from the ask price to find the spread. The forex broker keeps the spread as his fee/commission. For example, suppose you place an order using U.S. dollars to buy euros. If the ask price is $1.2500 and the bid is $1.2496, the difference of four pips is the broker’s share.
Multiply the spread by the number of units of currency bought (or sold). A standard “lot” of US dollars is $100,000. At EUR/USD = 1.2500 one lot equals 80,000 euros. If the spread is four pips (from Step 3), multiply 80,000 times $0.0004 to find the spread the forex broker keeps (in this example it works out to $32).
Tips
Expect a separate commission (also measured in pips) with electronic currency network (ECN) forex brokers. An ECN trade is different because the broker acts to arrange the trade between you and another party, rather than buying/selling the currency directly. For this service the ECN forex broker will add a commission charge (usually less than one pip). Calculate ECN commissions just as you do regular forex fees. Simply multiply the number of commission pips by the number of currency units bought or sold.
References
Tips
- Expect a separate commission (also measured in pips) with electronic currency network (ECN) forex brokers. An ECN trade is different because the broker acts to arrange the trade between you and another party, rather than buying/selling the currency directly. For this service the ECN forex broker will add a commission charge (usually less than one pip). Calculate ECN commissions just as you do regular forex fees. Simply multiply the number of commission pips by the number of currency units bought or sold.
Writer Bio
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.