Guide to forex trading costs
Forex trading is associated with different types of fees and commissions. Understanding forex trading costs can be very helpful for forex traders when planning their strategy.
Depending on the forex broker you are using, you will encounter different types of fees. While many traders look for brokers that charge the lowest fees, this is not always the right attitude or approach.
Some forex brokers offer very low commissions, tight spreads, or even zero commissions and spreads, but that does not mean you should start trading with them. Brokers with lower fees, in many cases, tend to fail to meet the expectations of forex traders.
For example, you can end up getting order rejections frequently and miss out on profitable opportunities in the market or experience slippage, causing worse entry and exit prices, reducing your profit or increasing your losses.
You also have to question how they profit without charging fees to traders. For example, Scandinavian Capital Markets charges either commissions or spreads, depending on your chosen trading account to cover execution costs and trading platform costs.
Therefore, you should expect to pay reasonable fees for high-quality services, but if you understand how the fees are charged, you could optimise your trading strategy to avoid paying too much. This guide explains the various forex trading costs and how they work.
Different types of fees charged by forex brokers
As we have already mentioned, forex brokers charge different types of fees. While some of these fees are associated with trading activities, others are charged while making deposits or withdrawals.
You should be expecting to deal with the following fees/commissions when trading forex:
- Spreads
- Commissions
- Swaps
- Deposit/Withdrawal fees
Let’s explore how these fees work and what you should know about them below.
Spreads in forex
When trading forex, you might have noticed that there are two prices for each currency pair shown in the trading platform. These are called the bid and ask prices.
The bid is the price at which the broker is willing to buy the base currency in exchange for the quoted currency, and the ask is the price at which the broker is willing to sell the base currency. The spread is the difference between the bid and ask prices.
If you want to open a sell (short) trade, the broker will quote the bid price, but the broker will quote the ask price if you open the buy (long) position.
To better understand how spreads in forex work, here is a specific example. Let’s say that you want to buy British pounds (GBP) with US dollars (USD). You open the trading platform and see that the price is $1.3400/$1.3405.
To open the buy (long) position, you would have to pay $1.3405. Let’s assume that the exchange rate has not changed and you decide to sell the GBP instantly; you will receive $1.3400.
As a result, you can see that this trade would have cost you $0.0005 (5 pips) simply because of the difference between bid-ask prices. Depending on the currency pair involved in the transaction, spreads can be narrower or wider.
Some brokers add a markup to the bid and ask prices they receive from their liquidity provider. In that case, they increase, the ask will be higher, and the bid will be lower.
Commissions in forex
Forex commissions are transaction fees brokers charge for opening and closing a position. Some brokers charge per lot, and others charge per million US dollars traded. Either way, the commission depends on the size of the transaction.
Suppose a broker charges $5 per lot per side, and you trade two lots of USD/JPY, you pay $10 to open and $10 to close your position. The total cost is $20. Similarly, suppose a broker charges $50 per million USD dollars traded. In that case, if you open a position for 200,000 USD/JPY, you’ll still pay $20.
Swaps in forex
In the forex market, swap rates are the difference between the interest rates of the currency pair traded. Some forex brokers or trading platforms might call the swap fee the rollover rate or the overnight fee. Swaps in forex are only charged when the position is held overnight by a trader.
If you leave buy positions open overnight, you will be charged a long swap fee. On the other hand, you will be charged a short swap fee if you leave a sell position open overnight. The swap fee is charged daily at 5 pm EST when the New York session closes and the Sydney session begins.
Therefore, a position closed before 16:55 EST will not be charged swaps, nor will a position opened at 17:05 EST.
Swap fees can have negative or positive rollover rates. If the swap is negative, you have to pay the difference between the interest rates, while if it’s positive, you receive the difference between the interest rates.
Traders are not required to calculate the rollover rates on their own, as most forex brokers display this rate in the trading platform. But some platforms calculate swaps differently. Sometimes swaps are calculated in pips or points; other times, they might be charged in per cent.
Suppose the EUR/USD long swap rate is -4.6737 points and the short swap rate is -0.5803 points. In that case, for a 100,000 position, you’d pay $4.67 for a long position or $0.58 for a short position.
Swaps are calculated using the following formula:
(Point position ÷ exchange rate) × position size × swap value in points
To calculate the swap fee of a long position in euro, we’d run the following through the calculator:
(0.00001 ÷ 1.1234) × 100,000 × -4.6737 = -4.16.
As the number is negative, that means you’d pay €3.81.
Many traders try to avoid swap fees as they don’t want to encounter additional expenses. Especially on Wednesdays, when triple swaps are charged.
However, some people have more serious reasons for avoiding swaps in forex. For example, this can be religious beliefs. In the Islamic world, dealing with any kind of interest rate is prohibited and considered haram. Many brokers in the market, just like Scandinavian Capital Markets, offer traders Islamic accounts, also known as swap-free accounts, which help them avoid paying or receiving any interest payments.
Deposit/withdrawal fees in forex
If you are looking for a low-cost forex broker, you should keep in mind the deposit and withdrawal fees charged by the broker. This is a very specific commission that many traders overlook. Deposit and withdrawal costs vary between forex brokers and payment methods.
Most forex brokers do not charge deposit and withdrawal fees and absorb the cost. In contrast, other brokers might only offer free deposits but charge for withdrawals. When depositing or withdrawing from some brokers, you might pay, for example, 1-3% or a fixed fee of €10-50. You might also incur currency exchange fees charged by your bank or theirs.
Although transaction costs are a fact of life, it’s worth keeping them in mind.
How to reduce forex costs
Reducing the costs of forex trading is something that many traders are dreaming about. By understanding how the costs of forex trading are calculated, you should be able to avoid paying excessive fees for trading forex.
One obvious way to avoid paying high forex trading costs is by closing all open positions before the trading day ends, especially on Wednesdays. This way, you will be able to avoid paying the rollover fees.
Another very helpful tip would be to avoid trading only for the sake of trading. Some traders close trades early to capture profits but jump back in when they see momentum continues. By doing this, you’re paying twice as much for making the same trade twice.
Make sure that you have a valid reason for every position you are opening or closing. The more positions you open when trading, the more fees you will have to pay. So, limiting the number of trades can cut down the fees and commissions associated with forex trading. Hence, scalping can be a very expensive way to trade.
Another consideration that you can keep in mind is to make sure that you do thorough research about the payment methods accepted by the broker you are using. Brokers usually provide detailed information about accepted payment solutions, associated fees, and expected processing time. Typically depositing using wire transfers is associated with lower fees, especially in comparison to credit cards or e-wallets.
Finally, you should remember that whenever you are trading forex, you are using the services provided by a broker. The fees you are paying are for receiving high-quality services.
Frequently asked questions
Why are swaps charged triple on Wednesdays?
Interest rates are charged daily, and there are seven days per week but only five trading days. Therefore, triple swaps or triple rollover is charged. This event takes place on Wednesdays because of how forex transactions are settled between brokers and banks. Forex transactions are settled on a T+2 basis, meaning two days after the transaction occurs. Therefore, a position kept open on a Wednesday will not settle until Monday, so the broker charges or pays swaps for Saturday and Sunday.