Is Forex Trading Really Commision Free? It's in the Spreads

Tuesday, November 4, 2008

One of the features of trading foreign currency that drew me into it's spider web is the idea of trading as frequently as you want with no commissions. If you trade stocks in this manner, then you are going to encounter ridiculous commission fees every day that really offset your take home profit. But with forex, there is technically not charged commission for brokers because it is factor into the pip spread.

After trading several thousand lots and at the same time listening to my colleagues and peers that I respect in the forex world, I came to the conclusion that commision free trading is rather a myth in the forex world because of the ability of each broker to change the spreads when they want. Let's go over an example:

Example 1:
Say you're doing rather well and have built your account up to where you are now trading 5 lots at a time. You see an opportunity to buy the GBP/USD and your broker normally has a 3 pip spread on this pair. At 5 lots, you are looking at approximately a $15 cost to buy 5 lots because of the spread. So ultimately the differnce between the bid and ask price is your commission paid. Fine and dandy, I hope it was a nice trade for you. BUT, let's look at the reality of what can happen.

Example 1 Horror Story:
So what happens when this trade with the GBP/USD you want to make is happening during a big news release? Well if you're reading this with any forex experience at all then you know that spreads can widen drastically during important news releases. So to get back to the example, you went through with this trade during the news and now the spread has increased to a RIDIULOUS 20 pips! This is the horror story folks, because now your 5 lots multiplied the 20 pip spread has just cost you approximately $100 in commissions. Wow, this is not what I signed up for when I started trading forex!

Welcome to the reality of the forex world for many of us. So what can I do to avoid these forex spread nightmares? There are two major ways to avoid this and without guidance, can be harder than they seem. The first tactic I use to minimize this is to not open or close any new trades around the news. I know there are times that if you have a position and you are losing a ton of pips that it is necessary to get out. There is no way to avoid this, just get out.

The second way to avoid obnoxious 1 pip spreads is to choose your broker carefully. I am not in a position to point you in any direction because of the extreme amount of brokers out there.

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