Commission

Commission, in the context of Forex and CFD trading, refers to the fee charged by a broker for executing a trade. This fee is usually a percentage of the total trade value or a fixed amount per trade. It is an additional cost to the spread, which is the difference between the buy and sell price of an asset.

How It Works

The commission charged by a broker can vary depending on the type of account and the broker's business model. Here's a simple breakdown:

• Percentage-Based Commission: Some brokers charge a percentage of the total trade value as commission. This is typically expressed as a pip value, where one pip is equal to 0.0001 in most currency pairs. For example, a 1.5 pip commission on a trade of $10,000 would be $15.
• Fixed Commission: Other brokers charge a fixed amount per trade, regardless of the trade size. This is often expressed in the base currency of the account. For instance, a fixed commission of $5 per trade would be the same for a $10,000 trade as it would be for a $100,000 trade.

Some brokers may also offer commission-free trading, but this is often accompanied by wider spreads to compensate for the lack of commission.

Why It Matters for Traders

Understanding and accounting for commission is crucial for traders as it directly impacts their bottom line. Here's why:

• Cost of Trading: Commission is a cost of trading, just like the spread. It's important to factor this into your trading strategy to ensure that your profits outweigh your costs.
• Account Selection: The type of account you choose can significantly impact the commission you pay. For example, ECN (Electronic Communication Network) accounts often charge a commission but offer tighter spreads, while STP (Straight Through Processing) accounts may not charge commission but have wider spreads.
• Trade Size: Commission can have a bigger impact on smaller trades. Traders should be aware of this and adjust their trading strategy accordingly.

Example

Let's say you're trading EUR/USD with a broker that charges a 1.5 pip commission. You decide to open a long position of $10,000. The current bid price is 1.12345 and the ask price is 1.12365 (a spread of 1 pip).

If you were to open this trade with a market order, you would buy at 1.12365. After the trade, you decide to close it at the bid price, 1.12345. Your profit would be the difference between the buy and sell price, minus the commission:

Profit = (Buy Price - Sell Price) - Commission

Profit = (1.12365 - 1.12345) - (1.5 pips * $10,000)

Profit = 0.00020 - $15

Profit = -$14.98

In this example, the commission has turned a potential profit into a loss.

Key Takeaways

• Commission is a fee charged by brokers for executing trades.
• Commission can be percentage-based or fixed, and it varies depending on the broker and account type.
• Understanding and accounting for commission is crucial for traders as it impacts their bottom line.
• Commission can have a bigger impact on smaller trades.