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  • Beginner
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  1. Beginner
    Early Stages for Beginners
    8 Topics
  2. Forex Terminology
    11 Topics
  3. Margin & Leverage
    2 Topics
  4. Intermediate
    Identifying Scams
    2 Topics
  5. Brokers for Beginners
    5 Topics
  6. Technical Analysis
    13 Topics
  7. Advanced
    Using Indicators
    6 Topics
  8. Technical Analysis (Part 2)
    8 Topics
  9. Market Structure
    5 Topics
  10. Fundamental Analysis
    9 Topics
  11. Completion
    Risk Management for Beginners
    8 Topics
  12. Psychology for Beginners
    7 Topics
  13. Personal Psychology Questions
    2 Topics

The Broker and the Spread

A broker is essentially someone who executes your trades in the market. They are the ones who connect you to your bank account, allow you to trade on their platform, and let you place trades with their brokerage.

You don’t pay the broker a monthly fee or anything. Some brokers make their money off of a small commission, but most brokers make their money off the spread of each trade. Luckily for you, the cost is already implemented into the price we see when we’re about to place a trade and it’s barely noticeable. To understand how the cost is calculated, let’s take a look at something called the bid and the ask price.

EXAMPLE: All Forex pairs are quoted with two prices: the bid and the ask price. Here we can get a better understanding of how our brokers end up making money!

When you look at MetaTrader 4 OR your broker’s platform, you’ll see a pair such as GBP/USD read as 1.8812/15. The first is the bid, the second is the ask price.
Bid: 1.88120
Ask: 1.88150

The BID, in this case, 1.8812, is the price at which your broker will buy the pair, whereas the ask, in this case, 1.8815, is the price that your broker will sell it.

Now, the definitions of the bid and the ask are not necessarily what needs to stick in your brain. The most important thing about them is how much money the broker makes per trade, and how much money you’ll be losing the minute you click buy or sell. All of this comes from the spread.

The SPREAD is the difference in pips between the bid and the ask price. The minute you open a trade, you will automatically be down a certain amount due to the broker taking his or her fee. This all depends on two things: the spread and your lot size. No need to put those math skills to work – the commission you pay your broker is already built into the cost, and your MetaTrader account will do that for you!

With the example above, the spread would be 3. Because 1.8812/15, there’s a 3 pip difference between the 12 & 15. Since the spread is 3, whatever lot size you use is MULTIPLIED by the spread (3) to get your broker fee and your immediate drawdown.

NOTE: We will discuss lot size in detail in the next section. We briefly stated earlier that this calculation was what we used to figure out how much money we were making and/or losing. While a pip shows us how far price is moving, a lot size is how many units we want to buy or sell. We’ll discuss this immediately in the next section.

EXAMPLE: If you used a .10 lot size, and the spread was 3, the minute you opened the trade, you would be losing -$0.30 (30 cents). That’s how much you paid the broker due to the current spread and your lot size.

If your lot size was .50 and the spread was 3, you would instantly be down $-1.50 the minute you clicked buy or sell.

Another scenario is an example we have below with a spread of 13.

Spread