How Much A Forex Broker Can Make From A Single Trader?
When you open a currency trading account, you are told by your forex broker that there are no commissions involved in forex trading. New traders take their brokers word as true. Most think that the cost of trading is minimal.
Forex brokers are also called FCMs (Futures Commission Merchants) sometimes. They make profits through the bid/offer spread they charge their clients for each currency pair. This bid/offer 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 day trading the currency markets, 5 times every day. Take away the weekends, when you cant trade, there are 250 trading days for you.
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 will be; (5) (250)(2)(200,000)= $500 M. Huge! Now lets calculate how much your broker 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/offer spread charged by the broker is only 2 pips. 2 Pips Spread Cost= (500M) (0.0002)/2= $50,000.
You can see yourself, the cost of trading with a 3 pips spread versus a 2 pips is $25,000. This is 50% of your account equity. You see, a 1 pip difference can result in $25,000 more as trading cost for you.
You will have to make a profit of $75,000 simply to break even. Trading costs are one of the reasons most active traders fail in the long run. - 23229
Forex brokers are also called FCMs (Futures Commission Merchants) sometimes. They make profits through the bid/offer spread they charge their clients for each currency pair. This bid/offer 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 day trading the currency markets, 5 times every day. Take away the weekends, when you cant trade, there are 250 trading days for you.
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 will be; (5) (250)(2)(200,000)= $500 M. Huge! Now lets calculate how much your broker 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/offer spread charged by the broker is only 2 pips. 2 Pips Spread Cost= (500M) (0.0002)/2= $50,000.
You can see yourself, the cost of trading with a 3 pips spread versus a 2 pips is $25,000. This is 50% of your account equity. You see, a 1 pip difference can result in $25,000 more as trading cost for you.
You will have to make a profit of $75,000 simply to break even. Trading costs are one of the reasons most active traders fail in the long run. - 23229
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 @ 6:02 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home