Monday, February 17, 2020

Introducing Broker or a Forex Affiliate?

As competitive as it gets in the forex affiliate industry, there is a thin line that divides an Introducing Broker and a Forex Affiliate. We take a look at the differences and of course the benefits of each of these commonly used forex partner types. Choosing the program that is best for you plays a crucial role in profiting from such a partnership in the forex industry. We explain to you the differences between an Introducing broker and a forex affiliate.

Introducing Broker

An IB finds most clients through a network that he or she has developed through personal or business relationships. An IB also usually has a business involved in the forex market; for instance, a signal service, a managed account service, forex education, a rebate return service, or maybe just some guidance to new traders. The Introducing Broker partnership type can be based on a simple referal basis, a white label program or money managers.

Compensation

Introducing Brokers are compensated through what is called a rebate or revenue share system in which part of the spread from each trade made is shared with the IB. For example, for each standard trade made by the IBs client, the IB is then compensated .75 (a hypothetical example) of a pip. On a Standard Lot level .75 of a pip equates to about $7.50. The goal of most IBs is to get multiple clients trading to compound the rebate into a residual income that they get monthly compensation. The pips compensation varies from one forex broker to another. There is another factor to consider, know as fixed and variable spreads. Something Introducing brokers needs to bear in mind before negotiating with a forex broker.

In essence, an IB will build a larger income every month based on the number of clients trading and eventually can develop a large enough network that a very large income stream can be generated.

Forex Affiliate

A forex affiliate finds most clients through a network of ad space that he or she has acquired or from their own personal website. Most Affiliates are not involved in forex on a trading level but do understand the magnitude of potential it holds. An affiliate’s goal of getting a trader to pick a specific broker is met through using banner ads, promotions, and email campaigns to drive traffic that is tracked so when a client does choose the broker, it is clear where the client was derived from.

Compensation

Affiliates are compensated on a Cost Per Acquisition Structure or CPA; the CPA structure works as a one time compensation for having the client open a trading account. The rate of the CPA is based on number of clients opened in a given month and the average funding amount of those clients. Some forex affiliate programs also compensate affiliates on a revenue share program.

The commissions under the revenue share program are calculated based on the pip spreads that a forex broker collects from the real money trades the user carries out in the global currency and commodities financial markets, minus bonuses and charge-backs.

In order to understand the commissions, we need to explain pips and the value of pips.

Pips

A “pip” is the smallest increment in any currency pair. In the EURUSD currency pair, a movement from .8941 to .8942 is one pip, so a pip is .0001. In USDJPY, a movement from 130.45 to 130.46 is one pip, so a pip is .01.  How much in dollars is this movement worth per 10,000 Euros in EURUSD?  How much is one pip worth per 10,000 Dollars in USDJPY? We refer to the size, in this case 10,000 units of the base currency, as the “Notional Amount”.

The formula for calculating a pip value is therefore:

(one pip, with proper decimal placement/currency exchange rate) x (Notional Amount)

Using EURUSD as an example, we have (.0001/.8942) x €10,000 = € 1.1183 (Value of a pip for the EURUSD trading pair per €10,000)

Using USDJPY as an example, we have (.01/130.46) x $10,000 = $0.77 (Value of a pip for the USDJPY trading pair per $10,000)

As an affiliate at 20% commission you would be getting 20% of €1.1183 which is €0.22366

If you are a forex affiliate, it is advisable to choose the plan that best suits you. If you believe that the traffic you send trade in good volumes, then it is better to choose the revenue share.

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