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Forex Brokers

Commission Free Forex Trading

Commission-Free Forex Trading: The Lie of the Century?

Many forex traders get upset when they hear the words “commission-free forex trading.” They claim the phrase is a dirty lie. John Carpenter, for instance, in his book Mastering the Trade, says that people who use that phrase “should be hanged.”

In one sense, these critics are correct that commission-free trading is a complete misnomer. The commission to the currency trading broker just goes by a different name: the spread. But the result is the same: a transaction fee attached to each trade.

However, the transaction cost structure of the forex markets must be further explored in order to decide whether or not the phrase commission-free forex trading for forex brokers is really as heinously untrue as some critics describe.

Virtually Commission-Free Trading--for Some Traders Only

Commission-free forex trading can and does happen every day, but it’s virtually commission-free, not actually commission-free.

Virtually commission-free meaning that it’s so close to commission-free that the commission is not worth worrying about.

It’s kind of like saying your drinking water is virtually pollution-free. There could be some amount of pollution in the water but it’s clean enough to gulp down.

But only certain traders experience the virtually commission-free forex markets. Many other traders experience the commission-full forex markets. They pay thousands upon thousands of dollars per month in “no commission” forex transaction fees.

The difference between these two groups is in the amount of trading they do. People who make a lot of trades pay a lot of transaction costs.

If You Trade Too Much, Forex Commissions Can Be Intolerable

High frequency day traders often trade hundreds of times per day. Every time they buy or sell, they start the position with a 2-5 pip disadvantage—they’re already in the hole, and now have to climb out of it—hundreds of times per day. That can get tiring and expensive.

For the intermediate or long-term currency trader, though, a 2 pip transaction cost on a position that will be held for two weeks or longer does, in our opinion, qualify as virtually commission-free forex trading in the sense that the cost of the broker’s services is extremely minimal relative to the value provided.

The cost/value equation is particularly optimal if you trade standard lot sizes, as opposed to mini or micro lots. The ability to get into a standard lot of 100,000 units for 2 pips is a good value that is better than many commission structures for stock or options trading.

The value to intermediate and long-term forex traders, of course, is in the leverage granted by the forex broker. To be able to control that much money by putting up only a fraction of your own money is a unique opportunity in the financial markets.

Especially if you have a valid thesis of where a market is heading.

Unacceptable Forex Broker Add-On Costs

All currency traders must accept that there is always going to be a cost of doing business to currency trading. Companies that create software programs, market their services, and lend you money are always, naturally, going to charge for their services.

What is unacceptable is not that there is cost, but the way that some FX brokers abuse their clients. Shady practices to watch out for include but are not limited to:

  1. Requoting. When you place an order to buy or sell and the forex trading platform seizes up, saying that your order is no longer available at that price, but you can buy at another, worse price, you are being requoted. Yes, requoting sometimes comes about honestly—the broker can’t get the former price so neither will you—but requoting happens far too frequently on certain trading systems to be all due to “technical difficulties.” Beware forex brokers that requote often.
  2. Perpetual Upselling. Trading forex successfully is about managing your time and your money. That’s why it’s an unacceptable cost of doing business when certain forex brokers harass you by email and phone, always trying to get you to buy something or pay attention to their amazing new offers or whatever. The best forex brokers let you come to them, confident in their product.
  3. Overtrading Encouragement. Obviously, the more you trade, the more your forex broker is guaranteed to make when they take that 2-5 pip vig off you. Still, a good forex broker knows where the lines are. Some forex brokers purposefully make it difficult to not trade more than you should. For instance, they make it hard for you to view long-term charts. Or they constantly bombard you with “fundamental data” news streams that psychologically induce you to think something’s happening and you need to get in on it. Or they don’t give you ready access to transaction cost data. Often, they do all that and more to help you overtrade—or at least not, under any circumstances, undertrade.

Any way you slice it, the prime method for reducing your forex trading transaction costs is to dedicate legitimate thought to each and every currency trade you place.

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