| It is one of the most talked-about advantages of | | | | sell the position immediately, then the most they |
| trading on the Forex-the commission-free trades! | | | | could sell it for would be the "bid" price of 1.246-or a |
| Unfortunately, while we would all like to think that | | | | loss of 4 pips. Since the typical Forex transaction is |
| Forex brokers are just out there executing trades | | | | conducted in $100,000 lots, that means that the |
| for the fun of it, the simple truth is that everyone | | | | broker made $40 in that currency exchange. |
| needs to make money-even the brokers. While they | | | | The spread will vary depending on the broker and |
| may not charge a traditional commission, brokers on | | | | the currencies being traded. Typically, the spread |
| the Forex still make their money whenever trades | | | | averages between 3-5 pips. Unfortunately, brokers |
| take place. Brokers actually are compensated in a | | | | are necessary tools in the Forex trading game if for |
| number of ways, including: | | | | no other reason than the sheer size of the |
| Â- Buying/Selling Currencies | | | | transactions. There is approximately 1.8 trillion dollars |
| Â- Earned interest on deposited funds | | | | exchanging hands on the Forex every day and these |
| Â- Converting and holding currencies | | | | transactions are conducted in $100,000 "lots" (there |
| Â- Rollover fees | | | | are also $10,000 mini-lots and even micro-lots). Thus, |
| It is in the buying and selling of currencies that | | | | it is typical for Forex transactions to be highly |
| brokers make the majority of their money. They | | | | leveraged with most traders only putting up $1,000 |
| make this money in something known as the | | | | (or 1/100) in capital. |
| "spread", or the difference between the asking and | | | | Forex brokers will tend to be partners or somehow |
| bidding price of the currency pair. The "ask" is the | | | | associated with investment banks and similar |
| price a retail Forex trader would pay for a position. | | | | institutions. These "backers" actually guarantee the |
| The "bid" price refers to the amount that an investor | | | | loans used to leverage Forex trades-and without |
| could then sell the position at. | | | | them-none of us could trade on the currencies |
| The smallest unit of measure in Forex trading is | | | | markets unless we were willing to risk more than the |
| known as a pip and it is equal to .0001 (except for | | | | 1% demanded by most brokers. |
| the Japanese Yen, which is .01). The difference | | | | Yes, the brokers do make money when investors |
| between the ask and bid price is typically only 3 or 4 | | | | trade on the Forex but they do provide a genuine |
| pips and this is what the broker makes when buying | | | | service. Just be careful to avoid trading too often |
| and selling currencies. | | | | because although the pips are small-they can |
| A broker is actually a middleman and never actually | | | | disappear quickly especially when investors try to |
| charges anyone directly. Instead, a broker purchases | | | | compensate for a loss by turning around and |
| a position from a larger investment institution and | | | | investing before doing their homework. Therefore, be |
| then sells it to the retail Forex trader while pocketing | | | | wary of any Forex broker that advocates any form |
| the difference between the two amounts. For | | | | of "day trading" or the like-it's a very, very |
| instance, a broker might set the "ask" price at 1.250 | | | | dangerous strategy to use in the most volatile and |
| and the "bid" price at 1.246. If the investor were to | | | | fluid market the world has ever known! |