Forex Trading Costs: How Does it Work？
Forex trading costs differentiate from one form to another. While getting started with Forex trading, the three most important forex trading costs most beginner traders encounter are spreads, commissions and swaps. While sometimes the words “spread” and “commission” appear to be synonymous, they do not refer to the same thing.
Spread is defined as the implied cost of the trade. This means, instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair being traded. Commissions, on the other hand, are fixed charges associated with each transaction onECN accounts. Commissions are generally charged per lot. Despite the fact that spreads are different from commissions, both serve the same purpose as compensation for forex brokers.
Failing to consider the Forex trading costs can reduce your potential profit substantially and drastically affect your portfolio performance. Lets examine each one in detail.
What is the Spread？
The spread is an important aspect of forex trading, which is basically the difference between thebid and ask pricesof a currency pair. It is crucial for Forex beginners to be aware of Spread as not knowing about it can lead to costly mistakes when it comes to risk management.
You must remember that every forex trade involves buying one currency pair and selling another. The currency on the left represents the base currency, and the one on the right represents the quote currency. In Forex trading, the “Ask” price represents the price of buying the base currency, while the “Bid” price represents the price of selling it. Spread is a difference between the “Ask” and the “Bid” prices of the traded currency pair.
Example:Ifthe“Ask”priceforthecurrencypairEUR/USDis1.15350andthe“Bid”priceis1.15300,thedifferenceof0.00050isthespread.
How to Calculate Spread in Forex？
The changes in the spread can be observed by small price movements called pips or points, which correspond to a change in the fifth decimal place of a currency pair (or the third decimal place for pairs quoted in JPY). As the gap widens, the spread widens as well. Spreads tend to be smaller during times of high liquidity, but wider during times of low liquidity. To calculate the spread in Forex, you need to figure out the difference between the “Ask” price and the “Bid” price of a currency pair.
Example:Let'sassumeyouaretradingtheEUR/USDcurrencypair,inwhichthecurrentquoteis$1.09156/138.Here,thefirstfigurerepresentsthe“Ask”priceof$1.09156,whereasthesecondfigurerepresentsthe“Bid”priceof$1.09138,andthespreadbetweenthetwois1.8pipsor18points.
What are the differentTypes of forex Spread？
Now you understand spread is the main factor contributing to forex trading costs. Forex traders have the option of choosing between Fixed and Floating spreads depending on what type of account they use.
Fixed Spread:Traders using a fixed spread are assured that the difference between Ask and Bid prices will remain constant no matter how much prices fluctuate. This proves to be very useful for accurate planning of trading costs, betterforex risk management, and protecting the trader from high costs. Fixed spreads are best suited for beginners, scalpers, short-term traders and even automated trading.
Floating Spread:Unlike the fixed spread, the floating spreads value is dynamic and constantly changes based on market conditions. Its value is influenced by many factors, including news announcements, the traded instrument, market liquidity and unscheduled events. Floating spreads have the downside of potentially having your positions closed if the spread widens dramatically, resulting in amargin call. Floating spreads tend to be more affordable than fixed ones, and this type of spread is better for long-term traders who have more flexibility in timing their positions.
A low spread is always preferable, as marginally higher spreads will cost you more money as the volume of trade increases. Traders should ensure that they pick their forex broker wisely by considering the different types of spreads that they offer. Take advantage of lower spreads on all major currencies from 0 to 3 pips withforex accounts.
What isForex Commission？
Forex commissions are based on the fact that trading mediators compensate themselves for the services they provide to ECN traders. However, the retail Forex industry is currently less favoured by this strategy. These commissions are taken from the Equity of a trading account, and not from the Balance!
These forex trading costs are typically associated with zero-spread accounts or ECN accounts with near-zero spreads. Depending on the trading volume and the chosen account type, commission rates may vary. Traders should be aware of this since volume is a very important factor when setting commissions. This type of commission is preferred by traders who prefer trading news and low liquidity markets. In the long run, paying these typical high commissions seems to prevent traders from experiencing abnormally wide spreads, requotes, and slippage.
The majority of forex currency pairs are traded commission-free. Nevertheless, brokers will apply spreads based on the currency pair traded, thevolatilitylevel, and the lot size of the trade. In contrast to the commission that is charged on entry and exit levels, the spread fee is paid upfront.
If we compare the non-commission forex brokers to commission forex brokers, we are talking about fixed spread brokers, variable spread brokers, and commission brokers. However, there is no difference in price between these forex trading costs. Typically, a broker with a tight spread and a low commission beats a non-commission broker when it comes to the overall cost of the trade.
What is Swap Fee in Forex？
Swap fees or rollover fees are overnight interest rates that are added or deducted from holding a position overnight. You will have to pay this cost only if you dont close the trading position before it extends into another trading day. Having a good understanding of how Forex swaps work is important when trading since it will affect your potential profits either positively or negatively.
Rollovers aren‘t much of a problem forintraday traders, as long as they don’t hold their positions overnight or for a very long time. Whenever you are engaging in a long trade, be sure to review the swap costs associated with the trade and make sure that it does not eat up too much of your profits.
How Do Forex Swaps Work？
Swap fees are determined by many factors, including the swap size, forecasts, and the current exchange rate dynamics for a particular currency pair. Swap values can be either negative or positive depending on the swap rate and the position taken on the trade. This means that either you are required to pay a fee or you will be paid a fee for holding your position overnight.
Forex traders who trade onleveragewill be charged for swap rates. When you open a leveraged position, you are essentially borrowing funds to open the position. If you open up a position on the Forex market, for example, you are effectively making two trades, buying one currency in the pair and selling the other. When you sell one currency, you borrow the amount to sell, which causes interest to accrue on that amount borrowed. On the other hand, if you buy the currency, you earn interest.
How to Calculate Swap rates in Forex？
Swaprates are calculated by the interest rate differential between the currencies being traded – i.e., the rate at which interest from one currency is exchanged for interest from another. The underlying factor here is the difference in interest rates between currencies paired together.
For example, consider you are buying a USD/JPY pair. The overnight rollover rate will be the difference between the interest rates in the United States and Japan. Assuming the interest rate in the United States is 5% and that in Japan is 4%, you would receive 1% as interest when trading USD/JPY. Since you are going long (long swap), the currency from a country with a higher interest rate, you are earning a 1% interest rate on the pair. In contrast, if you are going short (short swap) the currency pair, youll have to pay -1% interest.
What are Positive and Negative Swap rates？
The outcome of a currency pair trade is determined by the difference in theinterest ratesof the two currencies you are trading. For overnight positions, you will either be charged a positive swap or a negative swap rate.
A positive swap is a transaction in which you buy a currency with a higher interest rate and sell a currency with a lower interest rate. Similarly, if you buy a currency with a lower interest rate and sell a currency with a higher interest rate, then you are charged a negative swap.
How to check the swap rates on MT4？
Once youopen a Forex accountand access your trading account on the MT4 platform, you can easily check the swap rates for the currency pair you trade. To check the swap rates on MT4, select the ‘Market Watch’ section and right-click on a currency pair to reveal the drop-down menu. From the drop-down menu, click on ‘Symbols’ and expand the ‘Forex’ folder to view the list of currency pairs. Select a currency pair and then click ‘Properties’ to view the swap rate details.
While trading on AximTrade, you can directly access the swap rates of the currency pair as soon as you click on theTools & Specificationspage. In there, you can also view the margin and spread prices associated with the AximTrade account types as well as the charges associated with other trading instruments.
Overnight Trading Costs are important to monitor, as they increase the longer a trade remains open. Since a swap can be viewed as a form of interest or a fee charged by a broker, it poses a problem for Muslim traders following Sharia law. Brokers like AximTrade offer swap-free trading to solve this. Find out why most forex traders choose Aximtrade in our in-depthAximtrade review.
AximTrade swap-free trading is similar to a regular one except that there will be no overnight fees or interest. AximTrade swap-free trading is available to clients in certain regions, particularly for Islamic countries.
Examples of How to Calculate Forex Trading Costs
Now that you know about Forex trading costs and how to calculate your total cost per trade. Here is an example. Lets say you bought the EUR/USD pair with a position size of 1 lot (100,000 units). The following will be the costs of your trade using Standard and ECN accounts:
Using Standard Account:
Spread-IftheEUR/USDpairistradingat1.28853/850,thespreadis3pips.Thisisthefirstcostofyourtrade,andsinceyoubought1lotofthepair,yourspreadequals$30.Commission-AStandardaccountisspread-basedandcommission-freefortradersofalllevels.Swap-Theswapfeedependsontheinterestratesoftherespectivecurrenciesyouretrading.SwapLong=100,000(1standardlot)x(0.0001(1Pip)x-1.2(Swap))=100,000×0.0001x(-1.2)SwapLong=-$12.You'llbededucted-$12asinterest.SwapShort=100,000(1standardlot)x(0.0001(1Pip)x0.16=100,000×0.0001x(0.16)SwapShort=$1.60.You'llearn$1.60asinterest.
Using ECN Account:
Spread-ThespreadcostwillbethesameastheStandardaccount.IftheEUR/USDpairistradingat1.28853/852,thespreadis1pip.Thisisthefirstcostofyourtrade,andsinceyoubought1lotofthepair,yourspreadequals$10.Commission-Fora“Buy1lotEUR/USD”position,thetransactionvolumeis100,000units.Thecommissionischargedonbothopening($1.50)andclosingpositions($1.50).ThentheTotalCommissionwillbe:Open($1.50)+Close($1.50)=$3.Thecommissionfeeisdeductedatthebeginningofthetransactionforbothoperationsatthesametime(openingandclosing).Swap-Theswapfeedependsontheinterestratesoftherespectivecurrenciesyouretradingwith.SwapLong=100,000(1standardlot)x(0.0001(1Pip)x-0.72(Swap))=100,000x(0.0001x-0.72)SwapLong=-$7.20.You'llbededucted-$7.20asinterestSwapShort=100,000(1standardlot)x(0.0001(1Pip)x0.24(Swap))=100,000x(0.0001×0.24)SwapLong=$2.40.You'llearn$2.40asinterest
Trade Forex With The Most Reliable Trading Conditions
Finding the rightForex brokeris essential in order to execute successful trades and remain profitable with lesser forex trading costs. At AximTrade, we work with the best liquidity providers that offer us the best pricing in the markets, making our spreads comparable with some of the best offered globally.
AximTradeStandard accountoffers the lowest spread available in the market, a minimum of 1 pip on all majors accompanied by 0% commission rates. Experience the freedom to decide at which price you want to buy or sell, and execute the transaction at any time with easy access to real-time pricing of the forex market and quoted buy and sell prices for a wide range of instruments via our online platform.
Disclaimer:This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.
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