Trading in the Forex market is constantly growing in popularity. New Forex broker companies are opening up at a very high rate. Many people who are accustomed to working in jobs of 9-5 are leaving their jobs and start trading with hard currency. There are many explanations for the growth of the forex currency market, some of the most obvious is its size, its simplicity, and its potential benefits.
Now let’s talk about Forex trading. The vast majority of online Forex brokers advertise in very large letters on their website that do not charge any commission for trades. With the exception of a few brokers, the currency market allows traders to open and close positions with no commission whatsoever.
Therefore, it does not cost anything to trade in Forex. This, of course, raises the obvious question: How do Forex brokers make money?
This is where it gets complicated. It is true that many brokers do not charge direct commissions for trading in the Forex market ( ECN brokers do so), but brokers engaged in forex trading do not perform trades that tell traders the goodness of their hearts . You can be sure that they are profiting from your services and these are usually quite high. They charge what are known as spreads.
Before understanding what spreads are and how they are calculated, it is important to understand a fundamental principle on how the Forex trading system works. Everything is based on supply and demand, just like any other market. If there is a greater demand for dollars, the value of the dollar rises against other currencies. This is precisely how spreads are defined and calculated.
The spread is the difference between the price at which a broker is going to buy the currency for you and the price at which it is sold. So, for example, if you open a position where the base currency is the dollar, and since there is no shortage of dollar demand, the spread of this operation will almost always be smaller than a spread for a less common currency . Why? This is again, by supply and demand. The agent will have no problem whatsoever at the time of selling the dollars you just bought, so you do not need to charge the operator, or you, a higher spread. Now that, if the base currency of the position is the Vietnamese Dong), it is understood that it is very likely that the spread will be higher.
It is extremely important that Forex traders understand the importance of the spread when it comes to choosing a forex broker. The difference that a pip can make in the spread of a broker can be the difference between a successful Forex trader and one that fails completely in the currency trading market.
Just to summarize, let’s look at a specific example of a spread to understand how it works exactly. Let’s say that we have a USD / CAD purchase price of 120.00 (which is the price at which the agent is willing to buy the USD) and a sale price of 120.05 (the price at which the agent is willing to sell the USD ). In this case, the spread is equal to 0.05, or 0.0005 dollars, and the money goes directly into the pockets of the broker.