In this forex fees guide we will talk about currency trading related fees. Depending on your trading style, selecting a broker that offers you the best fees and understanding market fees, can save you a lot of money.
When starting out trading currency pairs, there’s a lot of information to digest. Starting from learning the simple terms such as quote and base currency to learning how to conduct technical and fundamental analysis. In addition, traders need to make sure that they’re getting information from trustworthy sources. When selecting a broker whom you are going to entrust your hard-earned money, there are a couple of things to take into consideration, such as: regulations, trading platforms, trading instruments, customer service, and fees.
The fee structures offered by various brokers may seem simple at the first glance, but in reality, there are a lot of nuances. In general, trading fees fall into 2 categories, brokerage fees and market fees.
Market fees
Market fees occur naturally and they are not related to your broker. For example, when you buy something on the market, can you sell it at the same price simultaneously? It will not be easy to do so, will it? The reason is that sellers and buyers have different agendas and opinions about the value of the thing you are reselling. The same is true for Forex pairs. The difference between the bid price and the ask price is called a spread.
How to save on market fees
There are ways to save on the spreads that are occurring naturally, without broker markups. When there are many buyers and sellers in the market, selling something at the desired price becomes much easier. In trading when a large number of buyers and sellers enter the market and trading volume increases, we get high liquidity. By trading highly liquid assets you can save on naturally occurring market fees. Keep in mind that liquidity increases during certain trading sessions such as London, New York and Tokyo. What’s more, activity is even higher when these markets overlap. For instance, overlap of London and New York trading sessions will give you the highest liquidity and the tightest spreads. Brokers can offer the best market prices to their clients when they have a large number of liquidity providers. As you may already know, the Forex market is not centralized and brokers play a major intermediary role between retail traders, institutional traders, banks, etc.
Major currencies are traded most frequently on the foreign exchange and therefore provide the best liquidity. These currencies are backed by strong economies that attract investors and make them reliable for trading. The major currencies include:
- EUR/USD – Euro vs US Dollar
- GBP/USD – British Pound vs US Dollar
- USD/CHF – US Dollar vs Swiss Franc
- USD/JPY – US Dollar vs Japanese Yen
- USD/CAD – US Dollar vs Canadian Dollar
- AUD/USD – Australian Dollar vs US Dollar
- NZD/USD – New Zealand Dollar vs US Dollar
Exotic currencies have one or both exotic currencies in a pair. Exotic pairs such as EUR/TRY, EUR/PLN, USD/SEK, USD/MXN, USD/NOK, etc. are traded far less frequently on the market. As a result spreads are high and therefore it’s not recommended for novice traders to speculate on Exotic currency prices. In addition to charging more trading fees, exotic pairs come with less consistent and reliable information regarding the market news, which is necessary for conducting any kind of analysis.
Brokerage fees
In addition to the naturally occurring spreads, brokers charge traders with additional fees. The income enables brokerage firms to keep providing financial services to their clients. Forex trading would not be possible without leverage due to the fact that currency valuation changes are not significant at any given moment. Brokers charge interest for landing the money to the traders for increasing their purchasing power. There are a couple of trading related fees that all traders should know about and we will discuss them all below in more detail. Make sure that there’s no hidden forex fees from your broker.
Commissions
Commissions are direct trading fees that are charged for landing the money to the traders. For instance, you might be offered a 7 USD round turn commission per standard lot. One standard lot represents 100,000 units of any currency. Some account types do not charge traders by any commissions, the reason is that the fees can be charged by other methods, such as spread markups. Usually accounts with commissions are standard type and they are aimed at novice and position traders.
Spread markups
Some brokers choose to charge their clients with the spread markups instead of commissions. For instance, if your broker offers you spreads from 1 pip, that means that every time you open a trade, 1 pip goes as fees to your broker and the rest of the spread is made by the market. As we have already mentioned, spreads are naturally occurring on the Forex market. You can find account types with spreads & zero commissions, zero spread markups & commissions and a little bit of both. Active traders that trade intraday prefer zero spread markups and raw prices.
Swaps
As we have already mentioned, Forex trading is a leveraged activity, meaning that the money traders are using to increase their purchasing power is borrowed from their brokers. Swaps are charged for keeping the position open overnight. Intraday traders open and close trading positions within a day to avoid fees on swaps.
Inactivity fees
Inactivity fees are common among traders. However, not all brokers are charging traders for keeping inactive accounts. Usually inactivity fees are charged monthly and after a certain time is passed from your last trade. For instance, a broker might charge you 10 USD per month after 12 months of inactivity. The fees will be deducted from your account and in most cases your account balance will not go negative as a result. As in the same case as mentioned above, deduction of 10 USD will continue unless the trading activity is renewed or the account balance becomes less than 10 USD.
Deposit and withdrawal fees
Deposits and withdrawals are usually made free of any charge. And most brokers are offering multiple methods for transferring money back and forth to your trading account. However, some funding options might be costly. For example, usually credit card and e-wallet withdrawals are free, but transferring funds through bank wire is charged by the intermediary companies. It’s important to choose a broker with low forex transaction fees.
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Fees on base currency conversion
Conversion expenditure occurs when you are depositing funds to your trading account in different currency from your day to day currency. Which is why it is important to choose the currency type that you use the most as your account base currency. For example, if you are using Euros daily, it makes sense for your account to have EUR as its base currency instead of USD.
Swap free account fees
Swap free accounts are often also called as Islamic accounts. The Islamic accounts enable traders from muslim countries to place orders without going against their own religious beliefs. Sharia law prohibits followers to profit with interests on loans. The same rule applies to banks and institutions. By offering Islamic accounts brokers remove swaps. However, swap free account holders are charged with additional fees such as administrative and increased spread markup fees to compensate for the swaps. Swap free accounts are usually not available in all of the countries and generally only traders from muslim countries can contact customer service and request the account conversion. Swap free accounts are usually limited in terms of number of instruments they can offer.
Education fees
In addition to trading fees charged by your broker, you might find yourself paying for learning how to trade from professionals. Trading classes are intended for beginner, intermediate and advanced traders. Usually prices increase as you approach an advanced level. The internet is full of high quality information on Forex that you can get for free. However, there’s a lot of low quality content as well. Moreover, there are many scammers in the market and you should always do your thorough research before investing in your education.
Copy trading and signal fees
In case you are planning to copy trade, you can copy some of the best currency traders that will charge you with monthly fees for outsourcing the trading decisions. You can also purchase a membership from signal providers. Trading signals are usually consumed by novice traders that seek guidance and traders that work 9 to 5 jobs or are managing business and do not have enough time to conduct market analysis.
Copy trading and signal trading might have a lot in common, but they are very different from each other. Copy trading is done automatically using your trading platform. Trades are managed automatically in proportional order sizes to the person you are copying. As for the trading signals, the ultimate decision is up to you.
How to save on fees and why is it important
As you can see, there can be various types of forex fees. Judging brokers by single criteria when comparing the fees of forex trading might cause you to make a misinformed decision. It’s important to take into account various factors such as the number of liquidity providers, spreads, commissions, inactivity fees, deposit and withdrawal fees.
At first glance, trading fees might not seem too large, but if you are a high frequency trader making 100+ trades a day, even 0.1 pip a difference can have a dramatic impact on your results at the end of the month. For position traders that are opening much less trades daily or even monthly, spreads might not be such a big deal.
The main takeaways
To sum everything up, Forex trading fees are associated with naturally occurring market spread fees and brokerage established fees. In order to get the best market spreads, you should trade highly liquid pairs like major currency pairs and during the most active trading sessions such as London, New York and Tokyo. There are two types of brokerage fees, direct and indirect. Direct fees are related to trading activity and include fees as commissions, spread markups and swaps. Indirect fees include: deposit and withdrawal fees, inactivity fees and currency conversion fees when depositing and withdrawing money from your balance in a different currency. Swap free accounts enable traders of muslim fate to trade without going against their religious beliefs. However, swap free doesn’t mean a better deal in terms of fees as usually brokers compensate by increasing administrative and spread markup fees.
FAQs on currency trading fees
How are forex fees calculated?
There are multiple ways traders are charged in the forex market. There are naturally occurring spreads, spread markups, commissions, swaps, inactivity fees, deposit and withdrawal fees and currency conversion fees in case you are using a different currency in your daily life from your trading account. Different brokers impose different rates on various trading instruments.
Does forex have a monthly fee?
Forex trading platforms are free to use and do not require any monthly fees. However, some brokers do have monthly inactivity fees that are charged after a certain period of inactivity.
Is there a withdrawal fee for forex?
Some brokers charge traders with withdrawal fees. And some brokers do not charge any fees, however, the intermediary companies might. For instance, generally credit card and e-wallet withdrawals are free but bank wire transfers are costly.
How can I save fees in forex?
There are multiple ways you can save money on fees. First and foremost is to find a broker that offers an optimal product for value. Secondly, you can trade instruments that are highly liquid and offer the tightest spreads.
How can I avoid trading fees?
Avoiding trading fees is impossible. However, minimizing the burden is absolutely achievable by choosing a proper broker and trading major currency pairs during major trading sessions.
