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NO16 - What are the Costs for Trading Forex?

"No matter what type of markets you are trading, you cannot avoid the trading fees or commissions. These fees are unavoidable because the broker is providing you with a service. The service could be something ranging from making the market for you to executing your trades as STP. Then there are also financing costs. As a trader, you should be aware of all the costs that you can incur when you are trading forex. Having said that, the costs of trading forex is much cheaper compared to the other markets. In this article, we give you an outline of the trading costs that you will incur in your forex journey. This is something that you should also consider when choosing a forex broker because the fee may vary. Understanding the different costs will help you to understand if your trading style is more expensive and will give you an option to choose the appropriate forex broker."

When you trade forex, perhaps the first thing that comes to mind is the profits that you will be making on a trade. But just as with any business, there are various overheads that you need to consider.

The forex markets are no different in this aspect. It is not just the profit and loss that you should be accounting for but also the costs of trading as well. This is often ignored because in the greater scheme of things, the costs of trading forex is quite less.

This is partly true. But let’s take this example. Say you are trading the EUR/USD currency pair for a month. You trade twice per day with a fixed stop of $10 and a fixed profit of $30. Thus, your daily risk is $20 while your daily profit is $60.

For a trading month of 20 days, you are making in total 40 trades. So for the whole month, your trading risk is $400 and your profit is $1,200. Of course this is the expected maximum profit and loss for the month.

Now let’s assume that you have a win rate of 60% of the time. This means that you have 24 winning trades and 16 losing trades. So, your overall profit is $720 and your loss is $160. Now your net profit is $560.

But every time you trade there is a spread or a commission that you pay. Assuming all things being equal, you pay $0.10 in commission. Given that you make 40 trades, you are charged a commission regardless of whether that trade was winning trade or a losing trade.

So your trading costs at the end of the month is $4. Deduct this from the net profit and you will see that your actual profit is $556.

There are other costs as well, which can slowly eat into your net profit margins. Let’s take a look at some of the common trading costs that you will come across in the forex markets.

What are the most common trading costs you can incur in forex?

Spread: The spread is the difference between the ask and bid prices. When you buy, you will be buying at a higher rate from your broker and when you sell, you will be selling at a lower rate to your broker. This is normal because the broker makes money by charging the spread.

The cost of the spread can vary depending on the contract size that you trade. Typically, if your broker charges a fixed spread of 3 pips, this can be as little as $0.30 to as high as $30 based on the lot size that you use.

Of course, the profits you make when using such high lot sizes can also be big, but notice that your costs are also bigger.

Overnight swap rates: The overnight swap rates are charged to your open positions that are kept overnight. This is the swap of the interest rates. If you are long on a currency whose interest rate is higher than the interest of the currency that you are short on, you are credited with a positive swap rate.

Conversely, if you are short on a currency with higher interest rate but long on a currency with lower interest rate, you are charged a negative swap. This means that the swap rate is deducted from your position.

As you can see from the above, depending on the currency pair and your long or short position, you can be credited or debited with the overnight swap fees. An important thing to note that that you are charged triple on Wednesdays in order to compensate for the swap rate which is not applicable over the weekends.

Commissions: Commissions are another form of costs that you will incur. Commissions are usually charged if your forex broker is an ECN or an STP broker. Under these circumstances, the broker charges you a flat commission based on a standard lot.

Thus, the more your trading volume is, the more commissions you pay. In some cases, brokers can charge you both commissions and spread which can eat a bit more into your bottom line profits.

We assume that you will be using one of the free forex trading platforms. But if you get to a high end broker you will end up paying more fees such as software fees, data fee and exchange fees and so on.

To be a good trader, you should focus not just on your trading strategy and style but also on the costs that you will incur when you are trading.

Read 927 times Last modified on Sunday, 12 May 2019 07:31