How to Save on Forex Trading Commissions to Boost Your Profits?
Estimated reading time: 4 minutes
Regardless of what activity you are engaged in, you have to pay commissions. You might think that Forex trading commissions are inevitable, but you can avoid them in your investment strategy. Let’s say more – the truth is that avoiding these payments will allow for higher profits.
We will try to deal with this issue in this article but let’s talk about everything in order.
What Are FX Trading Commissions?
In order to trade currencies on the Forex market, you will have a certain amount of fees that are necessary for this process. This is the consumption of an average Forex broker helping you make trades. The amount of commission directly depends on two factors: the broker you choose and the trading instrument you want to trade with.
The most common types of Forex commission are;
spreads – the commission you pay for the difference between buying and selling price of the currency pair
swaps – are paid for using leverage.
commission for opening a trading position – this commission is paid in parallel with spreads. Is common among the ones who trade with ECN brokers.
Define the ways Brokers charge for their services
There are two main ways how brokers charge commissions for the services they provide:
Fixed commissions
Each broker has a fixed commission individual. For each purchase or sale, they charge a certain amount of money, which they predetermine based on the quality of the service they offer. Basically, fixed commissions are charged from ECN brokers. Learn more about ECN brokers here.
Marked-up commissions
Some brokers drive the price up to the market spread by offering prices one or even several times higher. This is how these brokers make money.
Understand the impact of the position size to the commission you pay
The amount of commissions you need to pay based on two factors:
- your position size
The higher your position, the greater the number of lots you trade and commissions you pay.
- number of lots
The number of lots is determined by how close the stop loss is.
Stop loss is a risk management tool that is especially useful for beginners. It keeps the trades below the price at which things can go wrong really quickly and turn profitable again.
The size of commission grows due to decrease in stop losses and choice on number of lot sizes, which can be calculated with a Forex position sizing calculator.
Understand if you should go for wide stop-losses
However, this does not mean that if you place a wide stop loss you will reduce the commission amount. It really depends on what kind of broker you are: in the case of being a day trader, this is unlikely to work, but if you are a swing trader or a position one, you can easily put in a wide loss to decrease the commission.
Note that there is such a thing in Forex trading as a guaranteed stop loss. In case of any market fluctuations, a guaranteed stop loss can be set to maintain your trading position. This will help you trade in unstable conditions and avoid losing money when prices change drastically for no reason. Read more about Brokers with Guaranteed Stop Loss 2022.
Know the right way to deal with high transaction costs
When short-term day trading, it is important to keep your stop loss close so you can quickly reach the goal. In this case, you will be able to place more stop-losses per day, thereby increasing your profit.
It would seem that in case of a close stop-loss you should pay more commission, right? So why are we still talking about tight stop-losses in Forex trading?
Well, let us tell you about the trick of covering the costs.
Cover transaction costs according to your profit target
In order to cover the high transaction costs that have arisen because of the tight stop loss, you need to tweak your profit size.
Just increase it in tandem with tightening stop loss so that both are adjusted equally and do not outweigh the other.
Conclusion
With Forex trading, there is a lot going on in the background that you may not be aware of. From transaction costs and commissions to exchange rates – it all adds up.
With experimentation and practice, you can easily achieve success while reducing commission costs.
The article presented what Forex trading commissions are, its main types and how you can cover the main costs of a transaction.
By following some simple rules, you can easily trade on Forex and increase profits through this.
