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Understanding Trading Costs

Master spreads, commissions, and how to calculate real trading costs

What Are Spreads?

A spread is the difference between the BID price (sell) and the ASK price (buy). It's the built-in cost of trading.

  • EUR/USD BID: 1.0800
  • EUR/USD ASK: 1.0802
  • Spread: 2 pips

When you enter a trade, you lose money equal to the spread immediately. This is why brokers with tighter spreads are more profitable for traders.

Fixed vs Variable Spreads

Fixed Spreads: Always the same (e.g., always 1.5 pips) even during high volatility. Predictable but may be higher.

Variable Spreads: Change based on market conditions. Tight during calm markets (0.1 pips), wide during volatility (5+ pips). Better for active traders.

What Are Commissions?

ECN brokers charge a commission per trade INSTEAD of a wide spread. You pay per lot traded:

Broker Type Spread Commission Total Cost Per Lot
Retail Broker 2.0 pips None $20
ECN Broker 0.1 pips $5 $6

How to Calculate Real Trading Costs

Formula: (Spread in Pips × Pip Value) + Commission = Total Cost

For 1 Standard Lot (100,000 units) of EUR/USD:

  • 1 pip = $10
  • 2 pip spread = $20 cost
  • Plus commissions if applicable
Example: You trade 1 lot EUR/USD at a retail broker with 2 pip spread. You immediately lose $20, regardless of market direction, just to enter the trade. You need the market to move 2 pips in your favor just to break even!

Other Hidden Costs

  • Overnight Financing (Swap): Interest charged/paid when holding positions overnight
  • Withdrawal Fees: Some brokers charge to withdraw funds
  • Inactivity Fees: Charged if you don't trade for a period
  • Conversion Fees: When depositing/withdrawing in different currencies

Best Practices for Cost Management

  • Compare total costs, not just spreads
  • For day traders: Tight spreads are critical
  • For swing traders: Spreads matter less than overnight financing
  • Use a pip calculator: Understand costs before trading
  • Choose ECN if you trade frequently (commissions offset tight spreads)

Comparing Brokers by Cost

Don't just look at advertised spreads. Calculate the actual cost per trade:

  • Check spread on your most-traded pairs
  • Ask about average spreads during low/high volatility
  • Factor in commissions if ECN
  • Consider overnight financing if holding trades
  • Calculate breakeven pips needed to make $100 profit
Compare Broker Costs →