Global Forex Trading Questions – Part 2 of 4…

How do Forex commission work? Unlike options, futures or stocks, which are exchange-based markets, there is no commission in the Foreign Exchange market.  The FX firms behave like dealers, not brokers, a critical distinction needed to be understood by all investors. Unlike brokers, market risk is assumed by dealers through serving as counter party to an investor’s trade. No commission is charged; money is made through the Forex bid-ask spread mechanism instead.

An FX investor (Forex investor) cannot try to buy on bids or sell at offers as exchange-based markets do but once the price as cleared the spread cost, no additional commissions or fees are applicable. Every single cent gain becomes pure profit for the investor. Nonetheless, as traders always have to overcome a bid/ask spread, scalping is much more difficult to do (though not impossible) in Forex.

What’s a pip? The letters ‘PIP’ form the abbreviation and acronym: “percentage in point”. It is a standard unit of measure of trade, the smallest increment that can be made in FX. The FX market, quotes prices at the fourth decimal place. Imagine the true price of a soap bar to be $1.20 in a drugstore; the FX market would quote the same soap at 1.2000. A change to that fourth decimal place, or point, is referred to as 1 pip typically equal to one hundredth (1/100th) of one percent (1%.) The Japanese yen is the sole exception to the rule among major currencies because it has still not been revalued since WWII. 1 yen is approximately worth US$0.08; and so, in a USD/JPY pairing, the quotation only goes to two decimal places/points (1/100th yen, compared to the 1/1000th quote used for other major currencies in Forex).

Read Part 3 of Global Forex Trading Questions  >>