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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 RIDICULOUS 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 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. I will point you in the direction to the fantastic <a href=>Forex Peace Army website that has extensive forums that include user reviews with detailed descriptions of the good and bad of each broker. And believe me folks, the majority of these reviews are brutally honest and are from real small traders just like you and me. So I recommend you browse through the reviews so that before you choose a broker, you feel comfortable with what they offer.
Interesting Broker..A Surprising Review
While I used to cringe at the fact that a forex company would charge a commission, I might be rethinking my choice because of what I have heard about MB Trading. This broker charges $5 for every $100,000 traded, or 1 traditional forex lot. While this might seem like alot, think back to when the spreads widened on the GBP/USD trade and commissions went up to $100. I have heard that the spreads are very tight for this broker, and after hundreds of reviews has received a 4-star rating at Forex Peace Army. The main man at Forex Peace Army even has an account with them, and this is what he has to say:
I think MBTrading is a legitimate and honest company. I have an account with them. You basically get what’s promised to you. It’s an ECN broker that simply displays prices to you, and executes your orders through the banks, and in exchange charge you a commission. They don’t charge me for any profit withdrawals. They cut me checks very fast, so they are very good in terms of that.
-Felix Homogratus, FPA
And with that I will let you get back to your day. I hope this cleared things up a bit in terms of how forex trading can have rather high commissions when it comes to trading. Every heard the phrase there’s no such thing as a free lunch? This holds true in forex commissions and free magical forex systems that will fall out of the sky at your feet. If you find you find this useful and want to pass it on to your fellow traders you can Stumble this post below to get the word out faster. You might save your fellow trader a few bucks and some avoidable agony. Cheers and good trading.
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Sat, Oct 25, 2008
Blog, Trading Advice