How Does Your Forex Broker Make Money with No Commissions,iphone forex,iphone forex app,iphone forex chart

How Does Your Forex Broker Make Money with No Commissions?

When it comes to turning a profit, the FX trading industry is slightly different to many other financial markets. Most Forex brokers advertise themselves as not charging a commission for Forex trading, and in almost all cases - this is completely true.

But we all know that Forex brokers wouldn't be providing us with the facility to trade Forex for absolutely no reason. There still has to be a profit for them in some respect. Indeed - even thought it might not be obvious at first, your FX broker is earning money on every trade that you place. Continue reading below to find out how.

Spreads instead of Commissions

Many traders who started out in equity trading will be well familiarized with the profit model that equity brokerage firms employ. This model is applied as follows:

The equity broker charges a fixed amount (commission) for every trade that you place
Alternatively, a more modern commission structure is that you pay a set cost per share traded - i.e. 1000 shares at $0.015 per share commission = $15.00 commission.

Traditionally, this model has worked well. However, for Forex trading, the model is more difficult to apply. This is because of the vastly varying amount of money which can be traded in an individual trade. For example - one trader might be trading a mini lot - of 10,000 currency units, whereas another trader might be using 10 standard lots for a total of 1,000,000 currency units.

To get around this problem, Forex brokers use a spread-based profiting scheme.

How The Forex Trading Spread Works

The spread is the difference between the bid and ask prices shown when a currency pair is quoted. Essentially, in Forex trading, this spread is artificially inflated by the Forex broker. This is how they make their profit. Each and every time you place a trade, the broker is able to take a small amount of "commission" out of the bid / ask spread for themselves - because the price that is really being executed on is "better" than the price that you are seeing on your screen - by a small amount.

This is why we talk about the spread of a currency pair in pips. The EUR/USD for example often has a spread of 1 to 2 pips - however on the actual spot market, the spread is only 0.1 or 0.2 pips - hence the ability for the Forex broker to profit.

How Does Your Forex Broker Make Money with No Commissions?

Why is Foreign Exchange the Most Popular Market to Trade?

We've all seen those impressive figures bantered around about the Forex trading market. 5 trillion dollars in trade each day, 25 times the trading volume of the equity markets, etc. However, none of these statistics tell us why the foreign exchange market is actually rising in popularity.

In this article, we take a close look at the trends within the financial markets, to see exactly why it is that FX trading is becoming so popular among retail investors.

Endless Liquidity

One of the best things about the FX trading industry is that no matter what currency pair you are trading - there is almost an endless amount of liquidity in the market. This is even true for the exotic pairs.

Liquidity is important because it means that your trades can be entered and exited at any time, almost regardless of market conditions. With virtually endless liquidity - phenomena such as slippage and market gapping are almost non-existent.

High Leverage Trades

Whilst the amount of leverage a trader can use per trade has fallen recently, it is still up there with some of the most highly leveraged financial instruments in the world. With Forex trading, it is not uncommon for traders to employ up to 200:1 leverage - meaning that for every $1 in the account, $200 can be used to trade on the market.

Leverage has many important implications for FX trading, including:

The ability to magnify profits without the need for additional capital
Traders can participate in the markets without needing a huge amount of starting capital
Returns on Investment can be far higher than with traditional investments, without the additional risk

24 Hour Trading

The FX trading market is open 24 hours per day, 6 days per week. This is because the markets open when the New Zealand markets open (Sunday night American time), and close when the US markets end on Friday. Essentially, this is a 6 day trading week - and no matter where you live or which time zone you are in, you can still actively participate in the Forex trading markets.

This is a huge draw card for many people - especially those who might have to stay up all night to participate in an overseas equity market. Alternatively, people can trade part time, whilst keeping their day job and simply trading around those set work hours.

Why is Foreign Exchange the Most Popular Market to Trade?

3 Recent Changes in the Forex Trading Market

Just as many businesses, industries, and markets have changed since the financial crisis of 2008, the Forex market has recently undergone a number of interesting changes. For traders, this doesn't necessarily mean that their style of trading will need to change - but instead that they simply need to keep in mind the evolving dynamics of the market.

In this article, we'll take a look at the 3 most important and potentially influential changes which have taken place recently. Understanding these could help to improve your position in the market.

Change One: Leverage Requirements

One of the most obvious changes in the Forex trading market is the fact that leverage - which was once very easy to acquire - is getting all the more difficult to find. Sure, there are still firms out there offering 200:1 leverage, however their numbers are slim.

These days, it is more common to find the following leverage denominations:

20:1
50:1
100:1

Essentially, what this means is that brokerage firms are becoming less "gifting", and are settling for clients trading less on average - whilst still profiting from the spreads.

Change Two: Additional Volatility

Sure, we are certainly through the worst of the volatility, but that doesn't mean that the market has returned to the previous level of calm that was present before the crash.

One of the biggest changes here is the fact that a currency pair could be trading upwards one day, downwards the next - and absolutely nowhere on the third day. This is in contrast to a constant trend which might have been experienced before. For traders, this means that they need to fundamentally adjust the way they place trades - and utilize stop loss orders and risk limiting trades more than ever.

Change Three: Broker Competition

The recent financial crisis has proven that whilst many traders are loyal to their Forex broker, many are not. The fact that a single feature in the Forex trading market could swing a trader from one broker to another is proof that the competition in the industry has really hotted up recently.

As we all know, competition is great for consumers, and in this case - it simply means that traders are getting a better deal on the whole, with lower spreads, commissions, and costs.

3 Recent Changes in the Forex Trading Market

How Does Volatility Affect the Forex Markets?

Foreign exchange markets, like all other financial markets in the world, are affected by volatility to a great extent. On some days, trading can be a bit of a "bore" - as volatility is low. Alternatively, on other days, volatility could be high - and therefore prices in the FX world could fluctuate wildly.

But what actually is volatility, and who creates it? Furthermore, how do we predict volatility, and are there times where volatility is known to be higher than others?

Let's take a look at the answers to these questions.

What is Volatility?

Essentially, volatility is a gauge of the degree to which prices are changing. For example, let's take a currency pair - the EUR/USD - and see how volatility might appear.

Day One: EUR/USD trades between 1.3000 and 1.3100
Day Two: EUR/USD trades between 1.3000 and 1.3020

As you can see, the EUR/USD currency pair has traded in a 100 pip range on the first day, and then a 20 pip range on the second day. Which is the more volatile day? Obviously, the first day is. This illustrates exactly what volatility is - in its most basic context.

However, there is also one other consideration that volatility calculations take in to account. That is - how quickly the price changes. For example, going back to day one - if the currency pair gradually rose between 8am and 5pm from 1.3000 to 1.3100 - this wouldn't be particularly volatile. However, if it traded from 1.3000 to 1.3030 in the first 5 hours of the day, and then suddenly went from 1.3030 to 1.3100 in the last hour of the day - this would indicate a high level of volatility.

Hopefully this illustrates how volatility is created, and why it has important implications for traders in all financial markets.

How to Predict Volatility

Volatility is somewhat difficult to predict, because even the slightest piece of news or rumour in the market can cause currency pair prices to escalate or fall dramatically. Hence - it is best simply to not try to put too much weight on predicting where volatility will go.

However, there are times where volatility is known to be higher on average than others. One of these times is when a major piece of news is about to be released to the market. Take, for example - the non-farm payroll release which comes out on the first Friday of every month. Before this data piece is released, the markets usually see a spike in volatility as last minute trades are placed before the announcement. In this manner - you could actually profit from increased volatility if you are on the right side of the trade.

How Does Volatility Affect the Forex Markets?

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