How Much A Forex Broker Makes From A Single Account?
Jul 18, 2009 Health Insurance
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When you start currency trading, you are told by every forex broker that there are no commissions involved in forex trading. New traders take their brokers words as true and 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 to make it clear how trading costs can effect your trading. Bid/offer spreads are usually overlooked by retail traders as the price they have to pay for trading. So lets calculate what your cost of trading can be annually.
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 each trading position before the end of each trading day. That means each position is being traded 2 times, once when you open the trade and once when you close the trade.
Suppose; your account size is $ 50,000. You are using a leverage of only 4. So this $50,000 will control (50,000) (4) = $200,000.
Annual Turnover = (5) (250) (2) (200,000) = $500 Million. You can see the annual turnover of your trading is huge! Now lets calculate how much your broker will make and what your trading cost is based on your spread cost. 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 now, the cost of trading with a 3 pips spread versus a 2 pips is $25,000. Huge for you, this is 50% of your account equity. You see now that 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.
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