Tuesday, March 26, 2019

How are Forex Affiliate Commissions Calculated

calculating-forex-ib-commissionsFor most affiliates, especially for beginners it can be a daunting task when it comes to understanding how affiliate commissions are calculated when it comes forex. Unlike other niches such a retail where you get a fixed percentage for the sale and any future recurring sales, with forex the commissions are calculated differently. Knowing how commissions in forex are calculated can help keep you from your commissions getting shaved. Note that this article focuses on revenue share commission calculation in forex. The CPA model is quite straightforward, where you get a fixed CPA based on the depositing trader.

Forex Revenue Share Calculation

The industry average offers a revenue share commission starting from 20% onwards. But what does this mean? 20% of what? In order to understand this, we need to first learn how forex works and how brokers make their money.

Firstly, there are two kinds of brokers. Spread based and Commission only brokers.

Forex Revenue Share – Spread Based Brokers

Spread based brokers tend to mark up a few pips on their spreads (anywhere from 1 – 5 pips). This means that irrespective of whether a trader wins or loses, places a BUY or a SELL order, the broker takes a fixed spread as their fee.

Within the constrains of spread based brokers, you can also come across fixed and variable spread brokers. The Fixed spread brokers (which is a subset of spread based brokers and not to be confused with) charge a fixed spread irrespective of market conditions.

In forex, spreads (which is the difference between the bid and ask price) can vary based on liquidity. In times of low volatility, variable spreads can widen, whereas fixed spreads can offer the same spread regardless of active or inactive market times (ex: consider trading a cross such as EURCAD during Asian session).

Regardless whether the broker offers fixed or variable spreads, there is always a spread mark up with spread based brokers and it is based on this spread mark-up that you get your commissions.

Remember that forex is a zero-sum game. Meaning that for every trader that loses, there is a trader that wins.

So let’s take an example to further understand how you get your 20% commission when promoting a fixed spread broker.

1. You refer a trader who makes a $500 deposit with a 1:100 leverage. They only trade EURUSD. We know that a one pip move in EURUSD equals $1.

2. The broker charges a spread of 2 pips.

3. Your trader during the month, makes 20 trades, each with 0.1 Lot. With a spread of 2 pips (or $2), the total revenue made from this trader for the broker would equal $40.

4. On a 20% revenue share deal, your cut would be $8.

Forex Revenue Share – Commission only brokers

Commission only brokers, also referred to as straight through processing (ECN/Agency Model) charge a commission for the trades. They do not charge any spread as they are usually connected to a liquidity pool such as HotSpotFx, Currenex, Integral and so on.

Commission only brokers tend to charge commissions on a 1Lot basis and usually quote this as $6/Roundtrip.

This means that for a trade of 1lot, the broker charges $6 round-trip ($3 when the trade is opened and $3 when the trade is closed).

The commissions charged can vary between majors and crosses. For example, a pair like EURUSD could be charged a commission of $6, whereas a pair like GBPCHF could be charged $5. Regardless of the commission being charged, you get a certain percentage from this revenue. Let’s look at the following example for a better understanding.

1. You refer a trader who makes a deposit of $500 with 1:100 leverage and trades 0.1 Lots.

2. Your broker charges a commission of $6 for EURUSD and you get a 20% revenue share deal

3. The trader makes 20 trades, each with 0.1 lot. For 0.1 lot, the broker would charge $0.60. Therefore, the total commissions the broker would make would be $12.

4. So for a total revenue of $12, your commission would be $2.4

While Forex remains the focus for most deals, affiliates should also pay attention to detail when it comes to CFD’s. Especially CFD on metals (Gold/Silver) and Indices, stocks, etc.

The best way to monitor if you are getting the right deal is to do a monthly analysis of your referred trader’s trade history. Some, if not most forex brokers give out the trade details, which would look like this:

Forex Affiliate Commission Calculation

Forex Affiliate Commission Calculation

Conclusion:-

While calculating the final commissions, also bear in mind any deductions such as bonuses claimed. Most bonuses in forex work on a the same pip based model, so while calculating, make sure to convert the bonus into pip value. To know how much commissions or spreads the broker you promote charts, you can find this information under their ‘Trading Conditions‘ section which clearly states the spreads they charge or the commissions.

Commissions for CFD’s are also calculated the same way, but could differ from broker to broker, so make sure to visit the forex broker’s website to familiarize yourself with the fees and spreads.

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