We have decided on the types of accounts. There are two main ones, with an exchange spread and a broker spread. I constantly see discussions in chat rooms and on thematic forums on the topic of searches and comparisons of forex brokers with a low spread. In general, is there a relationship between the quality of the services provided and the size of the spread?
It would seem that the answers are quite obvious, everyone wants to get minimal spreads on Forex, but it’s not so simple. To understand this question in more detail, let’s answer the most important question: what do brokers earn?
- Commissions. This is the main source of income for any broker. For large brokers, this income item is so large (due to the huge number of customers) that they can afford to reduce their own commissions to almost minimum values. Each client, making a transaction, pays a commission, for example, 1 USD. If there are 10,000 clients, then the broker will receive a commission of 10,000 USD once. And how many transactions per day does each client make? Thus, the broker’s income from the commission or spread and form its main profit. But it is also impossible to infinitely reduce the size of these commissions since in any business there is a breakeven point. In addition to income, there are costs, and large brokers are also great. Understand and remember the most important thing: no broker can afford not to charge a commission from his clients. Otherwise, it will be unprofitable and very quickly become bankrupt. Large and reliable brokers can afford to reduce the spread, but only within reasonable limits. And if you are told that the broker does not have a commission, but also a “raw” spread, then these are scammers who earn not on the spread but on the drain.
- Attracting new customers and retaining existing ones. This is the second item of income of the broker, which, in fact, is the fuel for the first. There are customers, then there are deals, and if there are deals, then there is something to take the commission from. Everything is extremely simple. The field for the activities of brokerage companies is not so large, and there are a huge number of companies themselves. The struggle for a new client is sharp and constant. All that we (traders) need is for the broker to have conditions that would satisfy us. Of course, we all want us not to take a commission for the replenishment of accounts, there should be no spreads, swaps and other commissions, but this is impossible. For this reason, we are looking for brokers with the lowest fees. This is understood by brokers. They constantly reduce these commissions, offer us individual trading conditions and so on. When choosing a broker with minimal commissions, do not go too far. No one will ever work at a loss to himself. And if the broker does not take a commission from his clients, then he takes something else from them, which we do not even guess about. So better let everything be clear and transparent.
- Customer loss.Oh, how many times have I heard this phrase from different people, even from those who have nothing to do with the market. Yes, there is some truth in it, but only a fraction. The mechanics of the process are as follows: we make a deal on the exchange, laying part of our money in it. Further, our transaction is accepted and executed by a broker, listing it on the exchange. If the transaction is listed on the exchange, our counterparty will be the exchange or rather the bank. A counterparty is, in exchange terminology, one who enters into an obligation to execute a transaction in relation to us. To enter into an obligation means to become a defendant at the time of the outcome. In simple words: if we earned, our counterparty will give profit to us, if we lost, our counterparty will earn. So, in the case of the conclusion of the transaction on the “market”, the broker from the operation self-deletes and receives only a guaranteed commission. Actually, this is what most brokers do. But there may be a situation in which your broker will be your counterparty. And now, in case of your success, the profit will not be given to you by the exchange, but by the broker, from your own pocket. If you lose, your broker takes your loss. Of course, no one voluntarily agrees to give their hard-earned money. The exchange has a lot of mechanisms for this case, the main of which is a market maker, but the broker does not have such mechanisms – he can’t do anything special. Either give the profit to the client, recognizing the honesty of the situation according to the exchange rules, or do not give, just by deceiving. So, large brokers often act as counterparties to their clients but are always ready to pay what is due. And the client of these brokers, in fact, no matter who is his counterparty, the quote is the same. The reason for the failure will be in you, not in the broker since the conditions are the same. But novice brokers cannot receive sufficient income from the commission since few choose them. People are accustomed to trust more proven than new. Then these brokers go to various tricks. For example, they offer to trade without spreads and commissions in order to attract a client. But you must understand – under such conditions, the broker will be at a loss. Therefore, such brokers most often act as counterparties for transactions for their clients, so that in case of a client’s failure, they will take his money back. This is normal, but there is a problem. If the client makes a profit, the broker is unlikely to pay it. No, not because he is a con. He just has no money. There is no commission; there is nothing to earn from. So if you do not want to get to scammers, do not look for too favorable conditions. Remember:
How does forex spread work
Well, in what the spread in the forex market, we figured out. Now let’s see how it is written off.
Suppose we decide to complete a purchase transaction on the EURUSD currency pair. At the moment, the quote, or the value of a currency pair, is 1.11617 and 1.11616. 1 point difference is the difference between buying and selling. So, we decided to buy, which means someone should sell us. This seller is an exchange and its selling price is 1.11617. It is at this price that our transaction will open, despite the fact that the latest price on the chart will be 1.11616. This is because we pay the seller’s price.
A little time passed and the price rose, we decide to close our deal. To close a deal, you need to sell. And therefore find a buyer. The exchange found it for us and reports that its purchase price is now 1.11621, despite the fact that the exchange has a price of 1.11622. Thus, summing up all these prices, it turns out that in fact, the price went the distance between 1.11616 and 1.11622, that is 6 points, but we only earned the distance between 1.11617 and 1.11621, that is 4 points. 2 points that we did not count, and there is a spread.
As I said, the spread is the difference between the purchase price and the sale price. The figure above shows that at this moment in time there is no such difference and the spread is 0. This is possible only on accounts of the ECN type. And if we make a deal at this moment – we are lucky, we will fulfill the dream of any trader, plunge into forex trading without spreads. Just do not forget that they will charge a one-time commission for the fact of the transaction. On major trading instruments, the spread is always expressed in points. To understand what is the spread in the currency of your transaction, you need to translate it into money. This is easy to do if you know the value of the item.
We will wait for the moment when the spread expands and perform the calculations. So, the spread at the moment is 1 point. To determine what its value in money will be, we add the transaction volume to our conditions. For convenience, take a standard contract of 1 lot. At a standard volume, on the GBPUSD currency pair, the cost of one point is 1 USD. And since our spread is 1 point, then it will cost us 1 USD.
Thus, when making a transaction on our instrument with a contract of 1 lot, we will pay 1 USD of the spread that will be taken from us at the time of the transaction, and our trading will begin immediately with the loss, which will be the spread, and in order to return our we will need to earn at least this 1 point, which was taken from us. Everything is pretty simple.