How Much A Forex Broker Can Make From A Single Trader?
When you open a forex trading account, you will be told by your forex broker that there are no commissions involved in currency trading. Most of the new traders take their broker words as true. They think that the cost of trading is minimal.
Forex brokers are also known as FCMs (Futures Commission Merchants). They make profits through the bid/ask spread they charge their clients for each currency pairs. This bid/ask spread is your trading cost and profit for your broker.
Lets take a practical example. Bid/ask spreads are usually overlooked by the individual traders as the price they have to pay for trading. So lets calculate what your cost of trading can be in a year.
Suppose you are a day trader. You trade 5 times a day. Taking away the weekends, when you cant trade, there are 250 trading days.
As a day trader, you will open and close your position before the end of each trading day. That means each position is traded 2 times by you.
Suppose; your start with an account size of $50,000. You are using a leverage of 4 only, you are cautious. So this $50,000 deposit will control (50,000) (4) = $200,000 for you.
Your Annual Turnover should be; (5) (250) (2)(200,000)= $500 Million. Isnt it huge! Now lets calculate how much FCM will make and what your spread cost is. Spread Cost= (Annual Turnover) (spread)/2.
Suppose further, the bid/ask spread offered by the broker is 3 pips. 3 Pips Spread Cost= (500M) (0.0003)/2= $75,000.
Suppose the bid/ask spread offered by the broker is only 2 pips. 2 Pips Spread Cost= (500M) (0.0002)/2= $50,000.
The cost of trading with a 3 pips spread versus a 2 pips is $25,000. This is 50% of your account equity. You can see yourself that a 1 pip difference can result in $25,000 more of trading costs.
You will need to make a profit of $75,000 in a year simply to breakeven with a 3 pips spread. Trading costs are one of the most important reasons most active traders fail in the long run. - 23223
Forex brokers are also known as FCMs (Futures Commission Merchants). They make profits through the bid/ask spread they charge their clients for each currency pairs. This bid/ask spread is your trading cost and profit for your broker.
Lets take a practical example. Bid/ask spreads are usually overlooked by the individual traders as the price they have to pay for trading. So lets calculate what your cost of trading can be in a year.
Suppose you are a day trader. You trade 5 times a day. Taking away the weekends, when you cant trade, there are 250 trading days.
As a day trader, you will open and close your position before the end of each trading day. That means each position is traded 2 times by you.
Suppose; your start with an account size of $50,000. You are using a leverage of 4 only, you are cautious. So this $50,000 deposit will control (50,000) (4) = $200,000 for you.
Your Annual Turnover should be; (5) (250) (2)(200,000)= $500 Million. Isnt it huge! Now lets calculate how much FCM will make and what your spread cost is. Spread Cost= (Annual Turnover) (spread)/2.
Suppose further, the bid/ask spread offered by the broker is 3 pips. 3 Pips Spread Cost= (500M) (0.0003)/2= $75,000.
Suppose the bid/ask spread offered by the broker is only 2 pips. 2 Pips Spread Cost= (500M) (0.0002)/2= $50,000.
The cost of trading with a 3 pips spread versus a 2 pips is $25,000. This is 50% of your account equity. You can see yourself that a 1 pip difference can result in $25,000 more of trading costs.
You will need to make a profit of $75,000 in a year simply to breakeven with a 3 pips spread. Trading costs are one of the most important reasons most active traders fail in the long run. - 23223
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.
posted by X - Men @ 6:00 AM
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