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How Does Commission Free Forex Trading Work? One of the common questions that many beginners wonder about is commission free trading. How does it work? Well forex commission free isn't free because the forex dealers are such nice guys. It's because forex dealers make money from the spread. What's the spread? To illustrate the idea, we'll use an analogy. The forex dealer is like a middleman. Let's pretend he's a bread middleman. He buys bread at a “wholesale” price and he sells it at a “retail” price. So if you're a baker, you can ask the middleman how much he would buy your bread for. Let's say he quotes $1. So he's willing to pay $1 per loaf. On the other side of the equation, let's say you've just finished your last slice of bread, and you need a new loaf. So you call up your local middleman, and ask him how much he's willing to sell you (a customer) a loaf of bread for. And he quotes you $1.25. That sounds reasonable, so you tell him to drop one off for you. In this example, the bread middleman didn't charge you a commission to either the baker or you, the customer. Instead he bought at one price and sold at another. His pricing look like this:
He will let you buy from him at $1.25, and let you sell to him at $1. So every time the baker has bread to sell, he checks the middleman's sell price. And when you want to buy a loaf of bread, you check the buy price. Now in trading this is known as the bid and ask. The bid is the price you can sell at, the the ask is the price you can buy at. So for forex trading, you're quotes would look like this:
The forex dealer will let you buy from him at 1.1971 and will let you sell to him at 1.1967. The difference 0.0004 is known as the spread. And this spread is where the forex “middleman” makes his money. If you were to buy at 1.1971. The instant you buy, you're “down” 0.0004, because if you wanted out of the trade, the best price you could sell it for is 1.1967. So as the forex dealer takes varying trades from people, each buying or selling, he can make money from this price gap. To introduce some terminology, each minimum increment, in this case, 0.0001 is referred to as a “pip”. So the spread in this example is 4 pips. In terms of dollars, for a forex contract of $100,000, this transaction would cost you $40 ($100,000 x 0.0004) or 4 pips. So you'll find that some companies will advertise a spread of 3 pips on some currencies, usually ranging up to five on others. Obviously, the tighter the spread the better. Continued
success! He not only guides you on which currencies to focus on, he illustrates a simple way to incorporate trends, Fibonacci and price targets to help you focus on winning trades to an awesome degree. If you're at all interested, please visit his site at: http://www.market-millions.com/ez/go.php?sforex.htm2 he can tell you much more about it than I can.
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