How Much A Forex Broker Can Make From A Single Trader? | Retirement

How Much A Forex Broker Can Make From A Single Trader?

by Hass67

When you open a forex trading account, you will be told by your forex broker that there are no commissions involved in currency trading. Most of the new traders take their broker words as true. They think that the cost of trading is minimal.

Forex brokers also called FCMs (Futures Commission Merchants) make profits through the bid-ask spread they offer to their clients for each currency pair. This bid-ask spread is the trading cost for you and the profit for your FCM.

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. 5 times every day, taking away the weekends, when you cant trade, there are 250 trading days for you.

As a day trader, you will open and close your position before the end of each trading day. That means each position is traded 2 times by you.

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 the spread offered by the broker is 3 pips. 3 Pips Spread Cost= (500M) (0.0003)/2= $75,000.

Suppose, the spread offered by the broker is only 2 pips. 2 Pip 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 need to make a profit of $75,000 simply to break even with a 3 pips spread. Trading costs are one of the primary reasons most active traders fail in the long run.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.