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Most trading beginners have no idea what costs you have to expect when trading Forex or CFDs for example. Here terms like spreads, order fees, rollovers or swaps are used. Since these terms have less to do with everyday life, we would like to explain what these terms mean exactly and what Forex trading actually costs.
A distinction can be made between fixed costs such as spreads or commissions that are actually always incurred when trading and optional costs for additional services such as news feeds, extended charting packages or external trading software. With every trade that you place with your broker, 99% of the time the spreads occur. Some brokers (mostly ECN or STP brokers) charge a fixed order fee in addition to the spread, which depends on the volume traded. Many traders, especially beginners, often underestimate these costs, or are at least not really aware of them. Costs such as spreads or commissions can make the difference between success and failure in trading.
What exactly are spreads?
Spreads are fees that the broker charges for each trade. In simple terms, spreads are the difference between the bid and ask price. Another term is therefore the bid-ask spread. This fee is always charged to the trader, whether the trade is successful or not.
How exactly do spreads work?
This is relatively simple. The broker gives his client two prices for each tradable instrument such as a currency pair like EUR/USD. One is the buy price (bid price) and one is the sell price (ask price). The difference between these two prices is the spread, which is the broker’s source of income.
This example shows the spread for the broker GKFX on the DAX30 CFD.
As you can see, the buy price at this time is 9999.0 points and the sell price is 9998.0 points. This means that we could enter a long position at 9999.0 points. If we wanted to go short, we could enter at the same moment at 9998.0 points.
Thus the spread is 1 point.
The spread is therefore always the price at which your broker is prepared to buy or sell a financial instrument. The buy price is the highest price at which the broker is prepared to buy a financial instrument and the sell price is the lowest price at which the broker is prepared to sell the financial instrument.
Since the spread is always incurred when trading Forex or CFDs, it is one of the fixed trading fees. Therefore, when choosing a Forex broker, you should always make sure that the markets you want to trade mainly can be traded at the lowest possible spread.
Which difference the spread can make, we would like to explain to you with the following example:
In this example, Broker A requires a 1 pip spread for trading the EUR/USD, while Broker B requires a 2 pip spread for trading.
As you can see, after 5 trades you would have made a profit of 4 pips with Broker A, whereas with Broker B you would have suffered a loss of 1 pip due to the higher spread. Especially for traders who leave their positions in the market only for a short time, for example when scalping, and enter a high number of trades per day, the size of the spread has a great influence on the trading result.
Different types of spreads
There are 2 different types of spreads depending on the broker. A distinction is made here between variable and fixed spreads, whereby, as the name suggests, the variable spreads are variable and can fluctuate and the fixed spreads are fixed, i.e. fixed.
This is the most common variant used by brokers. Especially in very volatile markets, brokers usually offer variable spreads. Here, good and fast order execution is all the more important, as the spread can change during the execution of the order. For example, it is quite possible that a broker specifies a spread of 1 pip in EUR/USD, which is also available in quiet markets. However, in hectic market phases, the broker adjusts his spread according to the market conditions, and it is only possible to trade at a spread of 2 or 3 pips. This phenomenon is called a widening of the spread and is not unusual for some brokers. We therefore recommend that you visit our Forex Broker Comparison to find a suitable Forex broker who offers variable but good spreads for your trading. Because ultimately too high spreads reduce your profit.
Unlike variable spreads, there are also brokers who offer their clients fixed spreads on some or all instruments. The advantage here is of course that the spreads are always the same, regardless of the market situation. However, the broker often includes any market fluctuations in his prices, so that the spreads are generally somewhat higher. In hectic market phases, this can also lead to increased requests. However, this does not have to be the case with every broker. As so often, it depends on the individual case. Here too, we have clearly compared all brokers with fixed spreads for you.
Commissions & order fees
Some brokers charge an order fee in addition to the spread. Most of these are ECN or STP brokers who only pass on their clients’ orders to their affiliated banks or liquidity providers and therefore earn little or nothing on the spread. Therefore, a commission is charged here, which is due for each trade depending on the order volume.
Here the commission is calculated depending on the volume of the order. For example, if the broker demands 60 USD per million USD traded, this means that a commission of 6 USD is due per lot (because 1 lot corresponds to 100,000 units of the base currency). For variable commissions, the larger the order volume, the higher the commission. Some brokers also have scales here according to trade volume. With Dukascopy, for example, the commissions fall from a certain order volume.
So, traders who trade high volumes can naturally lower their fees.
Some brokers such as WH Selfinvest also charge a fixed fee in addition to the spread, which is independent of the order size. So here the volume of the trade is not important. This model is of course especially interesting for traders who trade larger volumes. For traders with smaller accounts this pricing model is of course rather disadvantageous.
Swaps and interest fees
If you wish to hold your trades overnight, you may incur additional fees when trading Forex or CFDs. These fees vary from broker to broker and also depend on the instrument traded and the trading direction (long or short). These fees are called swaps or rollover fees. Each market has a specific interest rate for positions that are held overnight. Depending on the market and the trading direction, it is also possible that the trader is credited interest for holding the position overnight.
Other possible fees
In addition to the normal costs of Forex trading such as spreads or commissions, there may be other fees. These include among others:
- Fees for the platform
- Fees for course supply
- Inactivity fee
- Quarterly fee
- Costs for telephone orders
Except for the fees for telephone orders, these fees do not occur with most Forex and CFD brokers. However, to be on the safe side, we recommend that you check with your favorite brokers in advance to see if any of the fees mentioned above may apply.
This would include, for example, costs for additional software such as news or data feeds. Especially if your trading strategy is also based on news or global events, additional data providers are often necessary to provide you with the required data. Depending on the provider, this can again result in different fees, which must be taken into account. But also costs for Forex signal providers or additional services like Autochartist, Molanis or VPS server for the automated operation of trading strategies fall under this point. Here, however, one should also make a good comparison, because some brokers provide their customers with many of the above-mentioned tools free of charge from a certain minimum deposit.
As you can see, there are several cost factors to consider when trading currencies or CFDs. Spreads, commissions and rollover fees are probably the most important for most traders. If you know your own strategy and know which products you have to keep the costs as low as possible, you can go on the search for a suitable broker. Because every Euro you pay less in fees increases your trading profit and can make the difference between success and failure.
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