When you are looking at the website of a prospective forex broker, one of the most highly-touted benefits of trading the foreign exchange market is that you do not need to pay any commissions. While this is technically true in most instances, it does not mean that you get to place trades for free either.

First, make sure that you understand what a commission is. A commission is a small fixed fee (which can be given in either a dollar amount or percentage) that you will get charged for every buy or sell order that you make. This money is used by your broker to manage the expenses they can incur by providing a trading environment that contains a live data feed, news feed, the development of trading platform software, etc.

Usually it is true that forex traders do not get charged a commission for placing trades, but trading is not free either. The forex broker will almost always have a spread for each currency pair, which is the difference between the bid and the ask price. Just to refresh, the bid price is the level at which your broker will buy from you and the ask price is the level at which the broker will sell to you. This spread, typically ranging from 1-5 pips, is really not that different from a commission, it just has a different name. In fact (depending on the size of your trades), the spread can sometimes cost a trader much more than a fixed commission would.

As an example of how a spread can sometimes be more costly than a fixed commission, let's say you were trading three standard lots of EUR/USD (1 standard lto is the equivalent of $100,000 units of currency). In this trade, every pip would be worth $30. So if you had a spread that was three pips, the amount that it would cost to place this trade would be $90. This cost is reflected by entering the market at the reduced bid/ask price, which simply means that you would need your position to move three pips in your direction in order to break even.

There are some instances in currency trading where you might find a broker that does charge a commission for placing trades, and this usually happens when the forex broker operates an Electronic Communications Network (ECN) to facilitate trading. An ECN is a highly interconnected network of many different computers and trading terminals, and liquidity is provided by matching together many different buyers and sellers all over the world at a near instantaneous speed (you've got to love technology).

Regardless of which type of forex broker you choose and whether they do or do not offer a fixed commission for trading, it is important to understand the commission free does not mean that trading is free. Rather, you will enter every trade that you make at a price that is slightly higher or lower than the current market values, and this is how your broker makes money.

Many a forex newbie has made the mistake of thinking that there were absolutely no costs involved in trading, and hopefully you now know that even commission free trading can still have costs associated with it.