Forex trading comes with its fair share of profit opportunities, but it also comes with several costs. Understanding what these costs are – as well as some of the hidden costs involved, is an important factor in being able to make informed decisions.
All Forex brokers have different cost structures when it comes to aspects like spreads, commissions, account fees, and rollover fees. So as a starting point, Roger Eskinazi, Managing Partner at Tickmill recommends that aspiring traders familiarise themselves with how their broker approaches these costs.
“Finding the right broker for your unique trading style and financial goals is a crucial step in ensuring that your trades are as profitable as possible both now and in the long term,” he says.
Understanding spreads
Elaborating on what some of these costs are, Eskinazi says that in most cases, Forex traders always keep a close eye on the spreads, which is a cost that is paid to the broker every time someone executes a trade. Even a small spread can add up over multiple trades and impact overall profitability.
Simply put, the spread is the difference between the buying (bid) and selling (ask) price of a currency pair. It’s essentially the cost of entering a trade and is usually measured in pips. A pip, or ‘percentage in point,’ is the smallest unit of price movement in forex trading and represents a fractional change in the exchange rate.
For example, consider a scenario in which the currency pair is USD/ZAR, where the bid price is 18.50 ZAR and the ask price is 18.55 ZAR. The spread in this case would be 0.05 ZAR – also referred to as 500 pips.
If the trader wants to buy 10,000 USD worth of ZAR at the asking price of 18.55 ZAR, the total cost of their opening position would be 185,500 ZAR. If the trader later decides to sell the 10,000 USD at the running bid rate of 18.50 ZAR, the total received would be 185,000 ZAR. In this case, the spread cost would be 500 ZAR, which would be the broker’s fee for facilitating the trade.
As the above example illustrates, knowing what the spread is before initiating the trade can make a significant difference to the level of profit realised. “By understanding and accounting for the spread, traders can better manage their trading strategies and potential profits,” says Eskinazi.
Broker commission
Another cost that traders need to be aware of is trading commission, which is a charge deducted at the time of opening a trade. Depending on the platform, commission is typically charged either on a ‘per million’ or ‘per traded lot’ basis.
Expanding on this Eskinazi says that “traders often overlook commission costs because they are not immediately deducted from their account balance, but these costs can add up quickly, so it’s definitely something to look into before forming a relationship with a broker. It’s also important for traders to compare the spread cost with the commission cost, because in some cases, they may be inversely related. In other words, when spreads are very low, commission structures may be very high.”
Inactivity and withdrawal fees
Two lesser-known fees that are often not accounted for when traders review their costs are inactivity and withdrawal fees. In the first instance, some brokers charge traders a fee if they do not initiate a trade for a specific time period. The size of this fee and the applicable period typically vary quite widely from broker to broker.
Secondly, when traders withdraw any funds from their brokerage account, most brokers charge a fee that is either fixed or commensurate to the amount being withdrawn. In most cases, this is done to cover any relevant processing fees and to discourage frequent withdrawals.
Consider the costs
The costs that come with online trading are at importance factor to account for, because they will have a direct impact on metrics such as net returns. This could in turn, impact how quickly and efficiently a trader is able to realise their financial goals. For this reason, Eskinazi recommends that traders factor these costs into their trading plan, and where necessary consult with their broker on how to manage these costs and keep them as low as possible.
“When looking for the right trading platform, this is one of the key operating philosophies to look out for, so you can ensure that your relationship with our broker is a long and fruitful one,” he said.
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