One of the most crucial parts of forex trading is understanding trading costs. A trading cost that many traders overlook, yet is extremely important to take into consideration, is commission. Commission in forex is one of the costs that can affect traders’ long-term probability. Basically, every time a trader enters or exits a position, they have to pay a fee, and these fees can add up if not managed carefully.
Forex commission can eat into any trader’s profits. On the other hand, if managed carefully, working with the right broker, a trader can minimize commission to maximize their gains from the market. This is why understanding the types of commission in forex is especially important when opening an account with a forex broker. Each structure, whether a fixed commission or a spread markup, has to align with the trader’s strategies and trading volume.
In this article, we will go over what commission in forex actually is, how it is charged by forex brokers, and what the best type of commission is for each trader’s trading style. Read on to learn more.
What is Commission in Forex?
Basically, commission is a fee that is charged by a forex broker for executing trades on the trader’s behalf. Alongside spreads and swap rates, commissions are one of the main methods that brokers make money.
Commissions are charged in several ways, which we will cover in detail below. Understanding the structures implemented to charge fees by brokers is essential for traders. Commissions have a significant impact on trader performance, especially when they are hidden or charged indirectly.
Types of Commission in Forex
There are four main types of commission in forex:
1. Fixed Commission
As the name suggests, a fixed commission model charges a specific set fee for every trade. Fixed commissions don’t care about the size of the trade or the market conditions. For example, a broker might charge traders $5 for each trade (round turn), whether you’re trading one micro-lot or one standard lot.
When Is It Used?
ECN (Electronic Communication Network) brokers use the fixed commission model. This model has various pros and cons.
Pros:
- Easy to calculate, manage, and plan for.
- Fixed commissions are usually combined with tight spreads.
- Fixed commissions are transparent and reliable
Cons:
- For smaller trades, fixed commission can be too expensive.
- Fixed commissions are not ideal for low-frequency or casual traders
2. Variable Commission
Variable commissions are fees that are prone to change based on a variety of factors, including trade size and market liquidity. For example, a variable commission might charge traders a percentage of the trade’s notional value.
When Is It Used?
Variable commissions are usually implemented by brokers that offer volume-based discounts or services in markets with high volatility, which means liquidity fluctuates a lot.
Pros:
- Variable commissions scale with the trader’s trading volume.
- For high-volume traders, these commissions may offer lower costs.
Cons:
- Variable commissions are more difficult to manage and plan for.
- Variable commissions are less transparent compared to fixed commissions.
3. Commission Per Lot
A commission per lot is perhaps the most straightforward forex model that exists. It is a model that is widely used by brokers to charge fees based on how many standard lots the trader trades. Standard lots are 100,000 units of base currency. An example of a commission per lot would be when a broker charges $7 per standard lot round trip. This means the fee for opening the position is $3.50 and the fee for closing it is $3.50.
Why Is It Important?
Commission per lot is a great model for active traders, algorithmic traders, and scalpers since these types of traders usually perform high values of trades. This model provides transparency and scalability based on trade volume.
Pros:
- Commissions per lot are easy to calculate based on trade volume.
- These commissions provide flexibility when it comes to trading activity.
Cons:
- Commissions per lot become too costly if the trader usually opens small positions.
- These types of commissions sometimes vary across account types.
4. Spread Markup
Some brokers don’t operate on commission at all. They offer a commission-free model. However, since commissions are an important part of the profit that every broker makes, they find other ways to make up for the money they lose with a commission-free models. Such brokers usually widen the spread (the difference between bid and ask prices) and pocket the difference. This makes up for the commission they don’t charge.
How Does It Work?
For example, if the broker offers a commission-free model, and the raw market spread is 0.1 pips, they may offer a 1.5-pip spread. This means that the difference, 1.4 pips, is essentially the broker’s commission.
Pros:
- There is no visible commission charge.
- No commission makes it simpler and friendlier for beginners.
Cons:
- Less transparency concerning costs.
- High spreads can cost traders more when it comes to volatile markets.
What is Spread in Forex Trading?
How is Commission Charged in Forex?
Several factors influence charging commissions in forex. Here are a few:
- Per Side vs. Round Turn: Charging per side means that the broker only charges commission when the trader opens a position. Whereas, charging round turn means that the broker charges both when opening and closing a position.
- Account Type Differences: ECN accounts usually offer lower spreads combined with higher commissions. On the other hand, standard accounts offer higher spreads and may be commission-free.
- Currency Pair: The currency pair being traded matters. Dealing with exotic pairs, traders have to come to terms with higher commissions or spreads since there is low liquidity for them. Check out this blog to learn more about currency pairs: What is a Currency Pair?
- Trade Volume: Sometimes brokers offer incentives like lower commissions for high-volume traders.
To better understand how to manage risk when it comes to commissions and other aspects of the forex market, read this blog: 10 Risk Management Strategies in Forex
How to Calculate Commission in Forex
Understanding how to calculate commission helps you manage risk and evaluate trade feasibility. Fixed commissions and commission-free models don’t need calculation. But we can take a look at examples of calculating commissions for commission per lot and variable commission models.
Formula (Commission Per Lot)
Commission = (Lots Traded × Commission per Lot)
As an example, let’s say that 3 lots were traded and there is a $6 round turn commission per lot implemented by the broker. The commission would be:
3 × $6 = $18 worth of commission
Such costs are applied whether you have made money or not. Let’s say you make trades like these 100 times a month. This would mean that each time you would have to pay $18 so in total, you would have paid $1800 to your broker. This is an example of how costs can accumulate if traders aren’t careful.
Variable Commission Example
Commission = Trade Volume × Commission Rate (%)
In this case, let’s say that the trade volume of a trader is $100,000 and the commission rate of the broker is 0.02%. The commission could be calculated as such:
$100,000 × 0.0002 = $20 worth of commission
Forex Commission Comparison
When selecting a forex broker, understanding the structure in which they implement commissions is important, because these fees directly affect the profitability of traders, especially in the long run. Here is a comparison of forex broker commissions:
| Broker | Account Type | Commission per Standard Lot |
|---|---|---|
| Fusion Markets | Classic Account | $0 |
| Fusion Markets | Zero Account | $4.50 |
| Pepperstone | Standard Account | $0 |
| Pepperstone | Razor Account | $7.00 |
| STP Trading | Zero Account | $5.00 |
| STP Trading | Zero Prime Account | From $3.50 |
| STP Trading | Standard Account | $6 |
The commissions mentioned in the table above are all subject to change, so its important for traders to keep themselves updated regarding the account types of the broker they work with. Commissions may change for various reasons. For example, brokers may differentiate between traders using MetaTrader 5 (MT5) or other trading platforms and offer different commissions based on the platform the trader uses. Choosing the right broker and account type also has to do with other aspects, such as allowing for anti-margin call strategies, such as hedging in a negative margin.
Conclusion: Choosing the Right Commission Structure for Forex Success
In forex trading, commissions have to be managed carefully in order for the profits of traders not to disappear. Managing commissions means that traders have to understand how different commission models operate, whether fixed, variable, per lot, or spread-based, and what works best for their trading strategies.
The cost of trading isn’t just the pip movement. It also includes fees like commissions and spreads. Therefore, it’s best for traders to work with the Best Forex Brokers in 2025. This includes STPTrading, which offers different trading account types for all trading strategies. Open a demo account today by registering at STPTrading!
