Most retail foreign exchange brokers will list "commission free trades" as one of the benefits that they offer to clients, but this statement can be potentially misleading and it is important to understand this in its proper context so that you do not lose money due to a misunderstanding of how currencies are priced. When you trade the stock market you will likely work with a broker that will charge you a commission for every trade that you place, as this is how the brokerage earns a profit and is able to maintain the resources necessary for constant market liquidity.
The statement "commission free" in forex trading does not mean that it is completely free to trade this market, it simply means that broker commissions are priced in a different format. On the stock market you can trade stock from any publicly traded company, and since the stock brokerage does not much care which of these companies you are trading they will charge a flat fee commission for buying or selling any stock. In the currency market however the amount of money that you pay for trading a particular currency pair has to do with the liquidity and market volume of that currency pair, and the lower the market volume is the more you will end up paying.
In forex instead of a commission you have a "spread," where the broker prices in a small difference between the buy and sell price of that currency pair. Unless you are a professional trader than the extent of your foreign exchange activity is likely confined to travelling to a foreign country, and when you exchange your dollars or pounds for another foreign currency you are likely only concerned with the second decimal place or the cents column. But in online foreign exchange trading you are concerned with the fourth decimal place or the 1/100th of a cent, and this is called a "price interest point" or commonly referred to as a pip. Your forex broker will determine a number of pips to separate the buy and sell prices for a certain currency pair, and when you enter into an open trade you will automatically need to gain this predetermined amount of pips in order to break even.
Some of the most popular and highly traded currency pairs will have lower spreads as low as one or two pips, and the more exotic and less frequently traded currency pairs will have spreads as high as 25 pips or more. When you are formulating your trading strategy for a given currency pair it is important to include the spread in your strategy, because if the spread is too high then you might need to hold an open trade for hours before you can even reach the break even point. This is the reason that common currency pairs such as the EUR/USD are very popular for day trading strategies where open trades are held only for minutes or a few hours, because the spread is low and it does not take very long for an open position to become profitable as long as the market is moving in the right direction.
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Ricky Weber is the creator of http://TheCurrencyMarkets.com which is a professional learning portal designed to teach people about online currency trading.
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