Beginner’s Guide to Broker Fees in the Forex and CFD Industry

Trading Fees

Trading fees in forex and CFD trading are costs associated with executing trades, including spreads, commissions, and overnight swap rates.

Spread

The spread is the most common and widespread type of cost in the trading industry. It represents the difference between the buy (ask) and sell (bid) prices of a financial instrument.

When you decide to place a long position (buy the underlying asset), you must pay the spread upfront. Conversely, when you initiate a short position (place a selling order), the broker lends you the margin needed to execute the trade. Later, when you close your position by buying back the asset, you pay the spread.

Check out our list of Best lowest spreads forex brokers.

Commission

The commission rate varies based on the volume of a position. Brokers typically publish their single-turn commission rates on their websites. A single-turn commission is a fee charged either to open a new trade or to close an existing one. In contrast, a round-turn commission is the total fee paid for completing a trade from opening to closing.

Consider this example to understand the impact of trading commissions: You wish to trade a full-sized EURUSD position, where a full contract equals 1 lot (100,000 units). If your broker charges a $2.5 single-turn commission on forex majors, you will pay $2.5 to open the trade and an additional $2.5 to close it. Depending on your account type, this $5 round-turn commission might also be charged in addition to the spread.

Swap Fee

In trading, the swap rate (or rollover) is the interest payable or receivable for holding a position open overnight. If you close a trade within the same trading day, no swap is applied.

Swap rates arise from changing interest rates at the interbank level, where financial brokers source their liquidity. As a result, swaps can positively or negatively impact a trader’s portfolio. A positive swap results in a credit to the trader’s account, while a negative swap leads to a deduction.

Consequently, swaps influence the performance of long-term trading strategies, which last more than a day, but do not affect intraday trading strategies, which are closed before the day ends.

‘Swap long’ refers to the swap rate applied to buying orders, and ‘swap short’ pertains to selling positions.

Explore Best brokers with low swap fees.

For example, let’s say you open a full-sized XAU/USD trade and see that the current swap long is -$5.25 and swap short is +$2.75. If you place a buy order and hold the position overnight, a $5.25 fee will be applied to your running profit/loss. This charge will be reapplied daily for as long as the trade remains open and the swap rates stay the same.

Conversely, if you place a short XAU/USD order and hold it overnight, $2.75 will be credited to your position’s running profit/loss each day, for as long as the trade remains open and the swap rates stay unchanged.

Conversion Fee

The conversion fee applies when trading instruments not denominated in your account’s base currency. For instance, if your base currency is USD and you wish to go long on the EURUSD, you would have to pay the equivalent amount (depending on the trade’s size) to exchange your dollars for euros.

Non-Trading Fees

The most typical non-trading fees in forex and CFD trading are deposit and withdrawal fees and inactivity fees.

Deposit and Withdrawal Fees

Most brokers charge a handling fee for deposits and/or withdrawals. The fee rate may vary depending on the payment method and transaction size. When applicable, the broker’s handling fee is applied in addition to any transaction fees charged by the payment processor.

Inactivity Fee

Some brokers charge an inactivity fee—also referred to as a maintenance or dormancy fee—to dormant accounts. The fee is charged when no account activity, such as withdrawals, deposits, or executed trades, occurs over a specific period, typically starting from three months. The dormancy fee is usually charged monthly until either account activity resumes or the account balance reaches zero.

Comparing Broker Fees

STP and ECN Accounts

The most important thing in assessing a broker’s fees is understanding the difference between spread-based accounts, typically referred to as ‘STP’ or ‘Standard’, and commission-based accounts, also called ‘ECN’ or ‘Raw’.

STP Accounts

STP, also known as Standard, accounts are designed for less experienced traders and typically have very low minimum deposit requirements. These accounts usually offer commission-free trading with floating spreads from 1.0 pips.

Brokers source their liquidity from external providers such as large financial institutions and banks, incurring raw spread costs. They then add a spread markup to generate revenue from Standard accounts.

Find Best STP forex brokers.

ECN Accounts

ECN accounts are generally tailored for more experienced traders. They offer more competitive prices but come with higher minimum deposit requirements.

These accounts typically feature raw spreads ranging from 0.0 to 0.4 pips and include a specific round-turn commission per traded lot. Generally speaking, ECN accounts are better suited for high-frequency and high-volume trading.

Check out Best ECN forex brokers.

STP and ECN Accounts Comparison

Beginner traders often mistakenly believe that Standard (STP) accounts offer more favorable pricing because they incur only one type of cost – the spread – unlike ECN accounts, which involve both the spread and a fixed commission. However, this is rarely the case.

In the table below, you can see the industry average spreads and commission rates that we sampled from our broker reviews on the EURUSD pair for the two account types:

If you are to trade 1 lot with a pip value of $10, your net cost on the Classic account would be $12 (1.2 x10+0), whereas the net cost on the ECN account would equal $8 (0.2 x10+6).

To assess the net cost of a trade, use the formula: Spread rate x pip value + commission

How FXEmpire Estimates Broker Fees

Our Methodology

We have conducted hundreds of broker reviews over the years, which have helped us develop a unique methodology for assessing the competitiveness of fees.

We record the spread rates on instruments from the most traded asset classes – FX pairs, metals, energies, share CFDs, indices, and cryptocurrencies. We take our measurements twice a day: during the London Open and New York Open, which are peak trading activity.

We also record a broker’s commission rates and swap charges and compare them to the industry average. This allows us to assess whether a broker offers competitive pricing for long-term trading (low swaps) and high-volume/high-frequency trading (low spreads and commissions).

Our Benchmarks

The table below shows the industry average spread rates on instruments across different asset classes. These values are derived from our numerous broker reviews and are continually updated.

How to Find a Broker With Competitive Fees

In assessing the competitiveness of a broker’s fees, you can:

1. Identify What You Are Going to Trade: Understand the types of instruments you want to trade (e.g., stocks, forex, commodities). This will help you determine what kind of fee structure is most cost-effective for you: raw spreads and fixed commissions or floating spreads and commission-free trading.
2. Check for Hidden Fees: Read the fine print in the broker’s terms and conditions to ensure there are no hidden charges or conditions that could increase your costs.
3. Test with a Demo Account: Many brokers offer free demo accounts where you can simulate trading without financial risk. Use this to see how the fees actually play out in real trading scenarios. However, make sure that there are no discrepancies between the pricing mechanism of the demo account and the broker’s live account corresponding to it.
4. Read Reviews at FXEmpire: Check out the broker reviews on our website, where we explain each broker’s pricing mechanisms and compare them to the industry average.

Practical Tips for Minimizing Fees

• Compare Brokers: Continuously compare different brokers to ensure you are getting the most competitive fee structure available for your trading needs.
• Choose the Right Account Type: If you trade frequently, an ECN account might save you more in the long run due to lower spreads, even if it has a commission.
• Be Mindful of Swap Fees: If you don’t want to incur overnight swap fees, close positions before the end of the trading day.
• Select Cost-Effective Payment Methods: Choose payment methods that incur lower deposit and withdrawal fees, and consider the broker’s handling fees for different payment options.
• Optimize Position Size: Adjust your position sizes to align with your trading capital and minimize the impact of fees on smaller trades.
• Leverage Loyalty Programs: Some brokers offer loyalty programs or rebates for frequent traders that can help offset trading costs.

Conclusion

Brokers have a wide range of trading and non-trading fees, and the competitiveness of these fees depends on factors like the frequency of your trades, executed volume, and the duration of your trades.

It’s crucial for traders to thoroughly understand the fee structure of their chosen broker, as these costs can significantly impact overall profitability. To effectively calculate the competitiveness of a broker’s fees, traders should compare the total cost of trades across different brokers, taking into account not just the spreads and commissions but also swap fees, conversion fees, and potential inactivity fees.

Understanding all potential fees and proactively calculating their impact is essential to maintaining cost-efficient trading and maximizing financial outcomes.