Another unique aspect of online currency trading is many firms do not charge cash commission fees. As mentioned, many firms make their money by profiting off the spread — buying cheap from the bank and selling to you at a premium, and vice versa when you want to sell.
Many firms advertise consistent five-pip spreads (a “pip” is the forex term for minimum trading increment or tick). However, this actually means you’re paying an extra five pips on top of the markup the bank has already charged to the dealer. If, for example, you see a quote on a particular trade of 109.04/09, that means the bid is 109.04 and the ask is 109.09, and the spread is five pips.
However, spreads can vary widely. Generally, the larger the transaction, the tighter the spread. Interbank spreads, for example, are usually around two pips, partly because forex trading has traditionally been done almost exclusively over the telephone. Because the manpower needed to handle a $100,000 trade is about the same as a $1 million trade or even larger, companies must make up that difference by increasing the spread on the smaller deal.
Most online forex dealers use the spread model.
However, more firms (primarily of the COES variety) are offering fixed commissions. Depending on your trading style, the size you trade and the size of the spread, one method is not necessarily better than the other. Some traders hear the words “no commission” and salivate. However, a loose spread will cost you more than a reasonable commission.
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