The forex industry points out that most forex brokers do not charge commissions. Indeed, you will not see the fee added when buying or selling a currency. However, everything is not that simple.
PRO traders tend to use third-party tools like a Forex commission calculator to ease their routine tasks and maximize their profits. Therefore, let’s see how Forex commissions work and why it is crucial to calculate them before entering a position.
How to calculate pips on Forex commissions
While there are some exceptions, fees are built into the pricing system used in Forex trading and are based on the difference between the bid and ask prices (called the spread). Prices are quoted in “pips,” which is the smallest amount by which the exchange rate of a currency can change.
Currencies are traded in pairs. The exchange rate tells you how much of one currency it takes to buy one unit of another. For example, if the euro and the US dollar are quoted at EUR/USD = 1.2500, you need $1.2500 to buy one euro. Quote to four decimal places because a US dollar pip is $0.0001 (1/100 of a cent).
Reminder: Forex brokers set commissions in pips.
Do it in practice
Look at the exchange rate listed for the currency pair. You will see two prices listed. The bid is the price the broker will pay you for the currency, and the ask is the price for which the broker will sell you the currency. Note that the ask is always a few pips above the bid.
Subtract the buy price from the sell price to find the spread. The forex broker keeps the spread as their fee/commission. For example, suppose you place an order using US dollars to buy euros. If the bid price is $1.2500 and the bid price is $1.2496, the four-pip difference is the broker’s share.
The spread is multiplied by the quantity of purchased currency units (or sold). The standard “lot” of US dollars is $100,000. With EUR/USD = 1.2500, one lot equals 80,000 euros. If the spread is four pips, multiply 80,000 by $0.0004 to find the spread that the forex broker supports ($32 in this example).
Expect a separate commission (also measured in pips) with Electronic Currency Network (ECN) forex brokers. An ECN trade differs in that the broker arranges a trade between you and the other party rather than buying/selling the currency directly.
The ECN forex broker will add a commission (usually less than one pip) for this service. Calculate ECN fees in the same way as normal forex fees. Simply multiply the number of commission points by the number of currency units bought or sold.
Up to you
And while calculating the fee is not as difficult as it may seem at first glance, it may become extra time-consuming if you do scalping, for example. That’s why having some ready-to-use tools at hand can become very handy.