Forex Brokers Fees and Costs Explained
Every Forex broker charges fees in one form or another and there are trading costs associated with each trade placed. Many traders often ignore the total cost per trade which can make a big difference to the overall outcome of a portfolio. While the most obvious cost is through spreads, there are other fees and costs which are applicable and should not be ignored. Transparent brokers will always be upfront about their fees and list them either on their website, in their trading platform with each trade ticket (or, ideally, in both places).
Overview of Direct Trading Costs
Direct trading costs consist of spreads, commissions, swap rates, overnight financing costs, storage fees and custodial fees. Not all costs apply to every trade and it all depends on which asset is traded, if it is traded on margin and the duration of each trade. All costs involved with each trade should be mentioned by the broker; transparent brokers list them in their trading conditions and also provide examples of how costs are incurred and calculated. In addition, trading costs can be found inside the trading platform. This is especially true if the broker offers a proprietary trading platform. Calculators are also provided which allow traders to calculate the cost of each trader before placing it.
Spreads are the most obvious cost associated with a trade and refers to the difference between bid and ask price. Spreads are the primary income source for brokers who live from the mark-up on raw spreads. Raw spreads can be as low as 0.0 pips in the EUR/USD, the most liquid currency pair which carries the lowest spread. Everything above this level is the mark-up the broker charges.
While spreads are listed on each broker’s website, traders can easily view them in their trading terminal.
Some accounts may come with spreads as low as 0.0 pips on the EUR/USD, but the broker charges a commission per lot. Accounts which charge commissions are usually ECN accounts which operate a no-dealing desk execution. Traders get the raw spreads, or very close to it, and in exchange the broker charges a commission.
Commissions are also charged on equity trades and various other assets (ETFs, ETC’s, bonds, etc.) will carry a commission charge. In order to get the full details on which assets carry a commission, traders should either consult the asset directory provided by their broker or get the information directly from the trading platform. Transparent brokers will list the full contract specifications on their website while proprietary trading platforms list all the information in each deal ticket. Volume discounts are often given to account which carry commissions.
Swap rates, sometime referred to rollover rates, apply to each position which is held overnight. Swap rates occur due to the interest rate differences in the base currency and the quote currency. Brokers will list how this rate is calculated and there is a Swap Long and a Swap Short rate. Depending if the traders take a long or short positions, swap rates will either be credited from or debited to the account balance. A lot of brokers fail to forward positive swap rates to traders.
Forex traders can check the precise swap in their MT4 Trading Platform by following these steps:
Right-click on the desired symbol in the “Market Watch” window and select “Symbols”.
Select the desired currency and then click on “Properties” located on the right side.
Scroll down until you see “Swap Long” and “Swap Short”
Overnight Financing Costs
This is a cost related to margin trades. Brokers will explain how the effective overnight financing rate is calculated. It depends on the amount of leverage used per trade and which asset is traded. This is an important cost to monitor as it increases the longer an asset remains open in the account.
Some brokers will charge traders a storage fee for holding certain assets. This is an unnecessary fee, but will be charged for holding positions in the account which comes on top of swap and/or financing fees. In essence it is a fee charged for maintaining positions in your portfolio. Brokers who charge storage fees should be avoided.
Equity, ETF and bonds come with custodial fees which are usually a small percentage charged annualized, but may be deducted monthly with a minimum. Not all brokers offer equity or bond trading and use CFDs which are great to get in on the price action without the need to incur custodial fees.
Overview of Indirect Trading Costs
Indirect trading costs are costs which are not charged per trade, but include costs such as withdrawal charges and account inactivity fees. Deposit charges are waived by all brokers, which is standard industry practice. Some brokers even reimburse their traders for deposits made via bank wire which is usually charged by the trader’s bank. Withdrawal fees are usually not charged by brokers, but third-party fees may apply such as bank wire charges. All charges relating to deposits and withdrawals should be listed on the brokers website.
Another unnecessary fee which some brokers charge is an account inactivity fee. This is usually applied after three months of no trading activity. The broker will then charge a quarterly cost, which will be listed in the trading conditions of the broker’s website, until the account balance is either depleted or trading resumed.
In general, all fees which a broker can charge will be listed in their website under trading conditions. Traders should carefully review this section as the lesser known costs are only mentioned there. In case this information is not provided, the broker is better avoided. Customer service can be contacted, but again, a transparent and trustworthy broker will not hide their costs. Costs like spreads and swaps are best accessed directly from the trading platform as they can change quickly due to market conditions. Using cost calculators provide by brokers can also be used in order to determine precise costs per asset and volume traded.