The foreign exchange (Forex) market dwarfs all others in terms of liquidity and daily trading volume. Forex trading is a popular investment channel, attracting individuals and institutions from all around the globe. Technological improvement has made it easier for just about anyone to join the market.
Unfortunately, the Forex market has many attendant expenses, making trading costly. For traders looking for ways to reduce their expenses, Forex rebates are indispensable.
A Forex rebate refers to a cashback program offered by Forex brokers. It involves returning a portion of the spread or commission paid on each trade to the trader’s account. The rebate is usually a percentage of the trading cost and can vary from one broker to another.
Primarily, brokers implement rebate programs to attract more clients because it increases their net earnings. The following paragraphs dig deeper into Forex rebates, providing granular details on how they work and their importance to traders. Read on to grow your knowledge.
How Forex Rebates Work
As stated earlier, a Forex rebate is a promotional program where brokers offer a portion of clients’ expenses back to earn their loyalty. The program’s other key objective is to encourage more trading. Forex rebate programs calculate a percentage of the trading cost the trader pays, which is then returned to the trader’s account as cash or credit.
Brokers use different methods to calculate rebates, commonly based on various factors. They include:
- Spread: Spread is the difference between the price at which a financial instrument is sold and bought – the bid and ask price. The spread is the primary means by which brokers earn from Forex, which is an expense from the trader’s perspective. Thus, a spread rebate is where a percentage of the spread paid on each trade is returned to the trader’s account. For example, if the spread on a particular currency pair is 2 pips, and the broker offers a 0.5 pip rebate, the trader will receive 0.5 pips back on every trade.
- Commission: Some brokers take a portion of the trade’s value as the cost of services, often called commission. The commission may be applied instead of spread, although some brokers may apply both. Thus, a commission rebate is based on a percentage of the commission charged by the broker.
- Lot Size: A lot in Forex refers to the unit measuring the transaction amount of a trade. A lot-size rebate is based on the lot size of the trade. The broker computes the rebate amount as a percentage of the notional value of the trade. For example, if the trader opens a $100,000 position, and the broker offers a 0.5% rebate, the trader will receive $500 back on the trade.
Suppose a Forex trader executes a trade on the EUR/USD currency pair with a lot size of 1.00. The broker’s spread on each trade is 2 pips, amounting to $20.
Let’s assume the broker offers a spread rebate of 0.5 pips per trade. Then, the trader will receive a rebate of $5 (0.5 pips x $10 per pip x 2 lots) per trade. The $5 rebate will be credited to the trader’s account, usually at the end of the trading day, as a cashback or a credit.
But what if the trader executes 100 trades in a month? Let’s assume each trade is of the same lot size and spread. Then, the total trading cost for the month will be $2000 (100 transactions x $20 per trade). With a Forex rebate of 0.5 pips, the trader will receive a total rebate of $500 for the month, significantly cutting the total trading cost to $1500.
However, it is important to note that different brokers have varying policies and rebate percentages. For example, some offer fixed rebate amounts for each trade, while others offer tiered rebates based on trading volume. Additionally, others may have restrictions on the types of accounts that are eligible for rebates.
How Do Rebates Make Your Life Easier?
Rebates are popular in the Forex market because they make traders’ lives easier. But how exactly do they achieve this?
- They Reduce Trading Costs: We illustrated earlier how rebate programs significantly reduce the total cost of trading. From the trader’s perspective, this is an opportunity to save money and ensure they extract the maximum value from their trading activities. Over time, the traders’ profitability improves.
- They Provide an Enhanced Trading Experience: By rewarding them for the effort going into market analysis and timing, the traders’ overall trading experience becomes more fulfilling. In addition, the rewards may encourage some to improve their skills and integrate more advanced trading tools into their regime, leading to better trading results and greater satisfaction.
- You Do Not Need Additional Effort to Improve Earnings: Every trader’s objective is to scale up their earnings as days go by. Unfortunately, many get discouraged and even drop out of the market if the earnings stagnate or they keep making losses. Fortunately, rebates ensure that whichever direction your trade goes, you can earn a token of appreciation for your effort.
