One of the many reasons that FX traders do not achieve success on their trading accounts is due the costs they are paying for trading. Different FX brokers have a range of ways to charge clients for using their services and it is a great idea to see how these could be affecting your profitability. The costs can be broken down into a number of areas and all of them will affect how you perform over the long term.
You have just opened your account and excited to get started trading on your live FX account. You enter in your card details and may be slightly shocked to see that you have been charged a processing fee but shrug this off because you are rearing to go. In many cases this could be as much as 2% of your initial deposit. $10,000 has been debited from your card but your account has only been credited with $9,800. Down $200 at the start but you think that can easily be made up on the first few trades.
Credit card companies also charge exorbitant fees to convert your local currency to dollars, for example. This can be as much as 10% in and out so see if you can deposit in your local currency and have you broker convert it at a better rate for you.
The next step is to start trading and after a bit of careful analysis, you are ready to place your first trade. EUR/USD is where the opportunity presents itself and the price is 1.10205 – 1.10235 (3 pip spread). The 3 pip spread is the cost of trading for you to open and close the trade. The market needs to move at least 3 pips for you to realise a profit. Now, how much would you save and how much more profitable would your trading be if your broker only charged you 1 pip?
Let’s take an example of someone that trades 5 times per day on the two different spreads with the same trade size.
|1 Pip Spread||3 Pip Spread|
|Risk (0.1 lot)||$1 per pip||$1 per pip|
|Number||5 trades||5 trades|
One can see that just by trading on a reduced spread you can save yourself $10 in the cost of your trading. If you traded each day for a month, you would be saving $200 and $2,400 over the course of a year. Not to be sneezed at!
*This example does not take into account that the market has to move much further before you are in a profit or could breakeven.
Swap charges are the costs that brokers charge you for holding a position overnight or over a weekend. These costs are a small interest charge for the broker lending you the money to hold a much bigger position than you would be able to do if you had bought the physical currency yourself. Trading FX is a margin or leverage product and so you only put up a small % of the actual value of the trade. The broker charges a Swap (interest) for the portion they lend you.
The Swap is calculated by using the difference between the two currencies interest rates and dividing this by 365 days to work out how much must be paid for holding the position overnight. This is the same calculation for all brokers but what you need to ask yourself is what additional amount is my broker charging.
Most brokers will add 2-3% on top of this and if it is any more then you should be looking elsewhere!
Many brokers will charge you commission on top of the spread you pay to execute your trades. What you need to look at is the total cost to trade to ensure you are getting the best value execution so you have the best chance of making money on your account.
If the spread is 1 pip and you are being charged commission of $1 for 0.1 lot, then your total cost of trading is $2 or 2 pips.
Other brokers will not charge commission at all and all of the costs will be included in the spread. Check how much you are paying because this will seriously affect how your account performs.
These are only relevant where you are trading futures contracts and wish to move your position into the next contract month. In this case, you will realise a profit or loss on the existing position but check what spread your broker is charging to move you to the next contract month. It is an easy place to extract a little extra commission without the client realising.
Some brokers have resorted to charging clients to withdraw their own money. This shocking tactic often puts clients off trying to withdraw their funds because of the additional costs. 3% has been heard of and if you are being charged these types of fees then you really should be looking for a new broker. There is really no need for any costs unless you wish to have your funds on the same day.
FX Trading Cost Don't Have To Be High
Keeping an eye on what you are being charged for your Forex trading as this can make a huge difference over the lifetime of your account. As the market has become more competitive, so have your choices and you don’t have to tolerate high costs of trading. Remember, if you are considering switching broker then please ensure they are regulated by one of the big regulatory bodies. Namely; FCA, FSB, ASIC or Cysec.