At a glance, forex trading might looks like free of cost. We could trade wherever and whenever by installing trading platform in our computer and gadget, so where is the cost? But actually, there are other cost that will make up your overall cost of forex trading.

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At a glance, forex trading might look free of cost. We could trade wherever and whenever by installing trading platforms in computers and gadgets, so where is the cost?

Well, when you open a Forex trading account, you've got to read about spread, commission, and swap (rollover). But actually, other costs will make up your overall cost of forex trading. Overheads like electricity, internet connectivity, and such could be considerably expensive in some parts of the world. As well as hidden costs like the opportunity cost.

In this article, we are going to talk about these costs. Make sure to bring out your notes and calculator.

 

Spread And Commission

Spread and Commission constituted forex broker revenues from their clients' trading activities. Spread is the difference between bid and ask prices which you will pay when you open an order. The difference will be reflected in the difference between the bid/ask price on the board with the actual bid/ask price on your order. It could be as low as 1 pip, and as high as fifty or sixty pips. Each broker provides a different spread arrangement; it could be floating or flat, and some even dispense with spread entirely and put on commission instead.

Commission is usually counted per a couple of lots that you are doing to trade, denominated in USD or other currencies. Spread will intervene in your strategy and could disturb the attainment of the Take Profit point and make your trade susceptible to miscalculation. However, the commission will not intervene directly in your trade; it is just something you have to pay when you open an order, regardless of whether it is successful or a losing one.

Some brokers charge both spread and commission, while others only impose one of them. The two will make up the most frequent cost in this business, so make sure that you choose a broker that gives you favorable quotes on your trading style. A scalper, for example, would do best with a broker who charges low spreads or fixed spreads.

 

Swap Rate Charges

On the other hand, swap (rollover) in forex trading is the cost of holding an open position overnight, shaped as some kind of interest rate. Swap charges are determined by the currency you hold on to and may differ based on which institution your broker benchmarked the swap. However, many brokers also offer swap-free accounts, which may or may not come with overnight charges in another method.

It was a long time ago when I was still a beginner in forex trading. I have opened GBP/USD and AUD/USD on long positions carelessly with the expectation that they are going to reverse back after touching a certain support level. It was Friday, a few hours before the market closed. Too bad for me, prices continued to fall till the end of the market that week. I let it open with hopes that prices will revert when the market opens on the following Monday.

But, guess what? it didn't! USD at the time was powerful, and bears pushed GBP and AUD further till Wednesday, at which point I decided to cut my losses as the swap was getting higher. I started to worry whether my funds would be able to survive without experiencing margin calls.

That is how swaps will influence the cost of forex trading. If you prefer to trade long-term, then you have to carefully count the swap charges that will be accumulated by the time you close your position.

 

Opportunity Cost Of Forex Trading

In my story, you can see how I got to the disadvantage of being unable to open more trades because my funds were already stretched on holding floating positions, some losing ones at that.

At that time, on Friday, I already had 3 floating positions in the EUR/USD pair in my $450 account. 2 buy positions with 0.1 lot each and 1 sell position with 0.02 lot. Both buy positions were floating a loss of 35 pips each, while the sell position with 0.02 lot was floating a profit of 7 pips.

Given that the account operates with a fixed spread and the spread for EUR/USD was 1 pip, the cost of the spread for three positions totaling 0.22 lot was approximately $6.6. As the positions were just opened that day, there were no swap costs.

2 buy orders of 0.2 lot: floating loss 35 pips = -$70
1 sell orders of 0.02 lot: floating profit 7 pips= +$1,4
Spread = -$6.6

Total floating = -$75.2

Equity = Balance - floating = $450 - $75.2 = $374.8

On Monday, the price unexpectedly dropped strongly by about 100 pips, resulting in a larger total loss. Both buy positions with a total of 0.2 lot were floating a loss of 130 pips, while the sell position with 0.02 lot was floating a profit of 102 pips.

Since the positions had been open for one day, there were now swap costs. The overnight swap for a 0.1 lot long position in EUR/USD was -$0.4, while the swap for a 0.02 lot short position in EUR/USD was +$0.01.

2 buy orders of 0.2 lot: floating loss 130 pips = -$260
1 sell orders of 0.02 lot: floating profit 102 pips= +$20,4
Spread = -$6.6
Swap =  (2 x -$0.4) + 0.01= -$0.79

Total floating = -$246.99

Equity = Balance - floating = $450 - $246.99 = $203.0

My account has started experiencing significant losses, but I'm holding on, hoping that the price will reverse and end up in profit. However, on Tuesday, EUR/USD continued to drop by 100 pips, increasing the overall loss, and I couldn't open new positions.

With the floating positions now held for two days, swap costs were escalating. The overnight swap for a 0.1 lot long position in EUR/USD was now -$0.79, and the swap for a 0.02 lot short position in EUR/USD was +$ 0.02.

2 buy orders of 0.2 lot: floating loss 230 pips = -$460
1 sell orders of 0.02 lot: floating profit 202 pips= +$40,4
Spread = -$6.6
Swap = (2 x -$0.79) + $0.02 = -$1.56

Total floating =  -$427.76

Equity = Balance - floating = $450 - $427.76 = $22.2

From the calculations, we can see that the total swap for the three floating positions over just two days amounted to -$1.56. If these positions were held for 30 days, the total swap cost would be -$23.76, surpassing the remaining equity of $22.2. In other words, my account would have experienced a margin call (and stop-out) before reaching the 30th day.

If only I had cut my losses early on, by Monday at least, then I could have recovered by opening trades in the opposite direction, or using my funds to trade other pairs that might result in profits. However, because I let the losing positions float, I was unable to do so and lost the chance to harvest profit through other means. This is what opportunity cost in forex trading means.

 

Tips to Minimize Growing Opportunity Costs

To avoid burgeoning opportunity costs (as well as swap charges), consider using short-term trading strategies like scalping or day trading. These trading styles involve positions that don't stay open overnight, eliminating the need for swap costs.

Additionally, you should stick to your trading plan steadfastly. In a trading plan that spans opening and closing trade, you have arranged a certain way to get out of the market, be it on Take Profit and Stop Loss, Trailing Stop, or other alternatives. Hold on to it, and never waver. But don't hesitate to cut your losses when the market turns unfavorable.

The trend always wins. By that means, rather than open trades against the ongoing trend, you will do better to follow the trend. To confirm which trend is underway, check on the higher timeframe than the one you usually use to open trades. Daily timeframe generally provides a clear insight into whether the trend is bullish or bearish.

Take care not to buy near the previous resistances or sell near the previous supports. You could hope for some breakout, but hope will stay 'hope' if the position where you open the trade is inherently bad.

Remember that in forex trading too, there are business costs that you should pay. Business costs like spread, commission, and swap are unavoidable, but opportunity costs are negligible. For other forex terms, you may access our FAQ page.