Reliable online brokerages, such as ours, strive to provide their traders with optimal conditions for making profits. This, naturally, must include charging commissions which are as low as possible.
It is impossible to do away with trading commissions altogether since there is an inevitable expense involved with operating online trading platforms. However, efficiency allows successful brokerages to charge very low spread based commissions, rather than set fees, trading volume percentages or cuts of profits made.
In order to understand how profits and commissions are determined it is essential to know what the spreads are and how they relate to these two key parameters of trading (i.e. profits and commissions). In the following paragraphs, you'll find all you need to know about spreads, commissions and profits.
A Spread is the difference, in pips, between the value of the financial product traded on when the trading position was opened (i.e. when the order to buy was issued) and its value when the trading position was closed (i.e. when the order to sell was issued).
For instance, a Forex trader decides to buy Euros using 10,000 U.S dollars to pay for them. The exchange rate Euro/U.S dollar at the beginning of the trade (when the order to buy Euros was issued) is 1.5026 (i.e. each Euro is worth 1 U.S dollar 50 cents, 2 tenths of a cent and 6 hundredths of a cent). If the exchange rate shifts in favor of the trader and they sell at 1.5139, the difference is 1.5139-1.5026 = 0.0113. Since the fourth digit after the decimal point is the one which stands for "pips" the spread is 113 pips. The profit they've made is 0.0113 times 10,000 = 113 U.S dollars.
Spread Based Commissions
In Forex trading, as with most of the numerous financial products we enable our traders to trade on, the commission is spread based.
The way it works is simple. When a trader issues an order to buy they pay not according to the current value of the financial product, they are trading on (known as the "ask price"). The investment is made at a rate that is a few pips higher (a rate known as the "bid price"). The difference in pips (the spread) between the asking price and the bid price, multiplied by the sum invested, is the only cost of executing the whole trade.
For instance, in the example above the Forex trader will buy Euros not at 1.5026 (the "asking price", the current Euro/U.S dollar exchange rate) but may pay 1.5029 dollars for each Euro. If they sell at 1.5139 they've made 110 U.S dollars and not 113 U.S dollars (which they would have made if they had bought at 1.5026), the 3 U.S dollar difference is the commission they paid for this trade.
Open Positions, Closed Positions and Profits
Once a trader issues an order to buy a certain financial product they open a trading position. This position remains open up until the product traded on is sold. The value of the product traded on may change, rise or fall, during the time the position remains open, profits or losses do not materialize until the position is closed. It is very important to understand that no profits were made, nor losses suffered before the order to sell is issued.
In order to make a profit, a trader must be able to sell the product they decided to trade on at a price that is higher than that at which they had bought it. If the asking price when the position was opened was 1.5016 and the trader bought at a bid price three pips higher (i.e. 1.5019) they can only close the position at a profit if they sell at an ask price that's 1.5020 and above, i.e. a spread between ask price at the beginning of the trade and that at the end of it of at least 4 pips.
As part of the exceptional conditions, we offer our traders the commissions we charge are extremely low. We invite you to open a trading account with us so that you too can begin taking advantage of all that our traders enjoy.