It comes as a surprise for many newbies to see a negative balance when they open their first trade, although the price has not moved. It comes to the understanding at that time that the broker provides its services for a reason, and you have to pay for access to financial assets and certain trading conditions. This is not surprising, as the broker is not just an intermediary between you and the global financial market, but also a commercial company that should bring profit to its founders.
That is why, to conduct effective risk management, a trader must not only be able to calculate the commission, but also understand the principles of its formation. This leads to an understanding of how the global market works and reveals the mystery of how and on what a brokerage company, including NordFX, makes money.
What Does the Broker Make Money On?
The Forex market is a decentralized system of currency exchange, where its participants are the world's largest banks, governments, and private investors. The main turnover of the cash supply is carried out by large players, so exchange processes are standardized, not in favour of mere laymen.
Imagine that 100,000 base currency units are required to complete a transaction (1 lot equals 100,000 USD). Most retail traders don't have that amount. Therefore, they resort to the services of a broker, as it adds the missing amount for the transaction to be concluded.
The broker also uses intermediaries: liquidity providers. As a rule, this is a pool of large banks that provide the most accurate quotes and prices for transactions at any given time. The number of liquidity providers that the brokerage company works with determines the accuracy of quotes, as well as the size of the commission that the trader will pay. NordFX works with several liquidity aggregators, whose pool includes the world's largest banks. Thanks to this, the terms a trader receives are among the best on the market.
Fundamentals of Honest Brokers Earnings or What Is a Spread
Spread is the cost paid by a trader to the brokerage when a trade opens, and the formula for calculating it is based on the difference between BID and ASK prices. You can watch the current prices in your MT4 trading terminal, this window is called "Market Watch". In addition, the typical and minimum spreads for each trading instrument are listed in the specifications for each type of trading account on the NordFX website.
If you run a logical chain, the broker's earnings are generated by companies adding a few points to the quotes they receive from liquidity providers. That is, the standard trading principle works: you buy cheaper and sell a bit more expensive. That is why honest brokers are interested in making a trader earn. To this end, they provide their clients with a huge amount of training materials, opportunities to gain practical skills by trading on demo accounts, analyses, and forecasts, as well as additional services such as a trader's calculator and economic events calendar.
In addition to (or instead of) the spread, there is another type of commission on certain types of accounts: the percentage per trading turnover. It is used on accounts with direct access to the liquidity provider, namely the quotes received by the broker itself. Such practices are common in currency ECN accounts and on the stock market when trading stocks or other underlying assets. While such a commission does not rule out a spread, if there is a direct exit to liquidity providers, the spread will be minimal.
Difference Between Floating and Fixed Spread
There are two types of spreads depending on the account type selected: fixed and floating. Fixed spread implies that it will be constant throughout the trade. If the account specification lists a fee value of 2 points, it will not change regardless of market activity. The broker takes all the risks of its changes, therefore, in most cases, its value will always be higher than that of a floating one.
A floating spread, unlike a fixed one, is as close as possible to market conditions, and its value is always dynamic. Its value is influenced by several factors, such as market activity, its saturation with participants and current trading volumes. If demand matches supply, the spread may tend to zero. Therefore, you can observe the widening of spreads at night or, for example, during the Christmas holidays, when there are no active trading sessions (the so-called "thin" market). Spreads also grow at the time of important economic news releases, as aggregators and brokers seek to insure themselves against possible losses in the face of sharp price spikes.
What type of account to choose is up to the trader themselves. But it is generally accepted that accounts with a fixed spread (Fix account in NordFX) are preferable for beginners. Floating spread is suitable for more experienced traders (Pro and Zero accounts at NordFX). This type of commission is more attractive in terms of cheaper trading, especially for those who practice scalping, intraday trading, and open a large number of orders. However, working with a floating spread is more difficult in practice since the SL and TP levels have to be set taking into account its dynamic nature.
Swap or Why I Am Charged for Moving a Transaction to the Next Day
The next unpleasant surprise that beginners are sure to face is swap: a fee for transferring a position to the next day. Many people mistakenly believe that this is just another source of income for the brokerage company. However, this fee may not only be charged to the trader's account, but also, conversely, be paid to him or her. That is, you can not only lose on the swap, but also earn money. Professionals call such earnings Carry trade, and they can be part of the trading strategy used.
The size of the swap depends on many factors, including the size of the swap from the liquidity provider, forecasts, and the current dynamics of the exchange rate for a particular currency pair, etc. The underlying factor here is the difference in interest rates on currencies as a pair. A positive swap occurs when you buy a currency with a high interest rate for a currency with a low interest rate. Conversely, a negative swap occurs when buying a currency with a low rate for a currency with a high rate of interest on the loan. For example, when you open a long position on the USD/ZAR pair, the fee that will be written off from the trader's account will be 37 points, and at short position the trader will be credited 7 points.
It is natural that when interest rates change, central banks will change the size of swaps as well. Their current value can always be found on the NordFX website in the specifications of trading accounts.
For those traders who trade intraday, the size of the swap is not important. However, if you hold a position open for several days, weeks, or even months, the swap becomes a factor that seriously affects the amount of profit or loss on this transaction.
Islamic or Swap Free Accounts
Due to religious beliefs, persons professing Islam are forbidden to give and take money at interest, therefore, classical trading with the transfer of transactions to the next day becomes impossible. A special type of account is created for such customers, Swap Free, which exempts the payment and accrual of the swap. Instead, the trader pays a fixed commission. You can use this service by making a request to the NordFX Support Service.
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