The majority of people who start in the forex market, do so without knowing the costs associated with trading.
The main cost for forex trading is the spread. Everyone who wants to trade the markets should study very well what the spread is, and what the best brokers are in this respect. We will always try to look for the lowest spread. However, we never should choose a broker only because of the spread. There are other factors, like the security; if the broker is in a serious country; if it has a good reputation, etcetera. It will do me no good to have a 0.1 pip spread if the broker is a scam and steals your money – a typical case when you open an account with a dubious broker in some exotic country.
Sometimes, it is much better to have a broker with a higher spread and more security.
If you do day trading, the spread is critical. But, if you do trend or swing trading, it is not that important. If you have a 60 or 80 pips stop loss order, you can handle a bigger spread.
Forex spreads lowest
In forex there are fixed and variable spreads. The first is used by the so-called market makers, and the second by ECN brokers; but actually most of them are market makers anyhow. ECN brokers usually offer a lower spread, but we have to pay commissions for each trade, in a similar way to the futures markets.
Ideally, it would be best to trade with ECN brokers that offer us depth of market, where we can see the actual volume of the market and the size of the orders at each prize. It does not mean that fixed spread brokers are bad per se. You can trade intelligently with a fixed spread broker as long as you do swing or trend trading.
Many of the world leader brokers offer different accounts. Usually a fixed spread account for small customers and ECN type for bigger accounts.
This issue is not very important at the beginning as long as you try to develop a swing or trend trading strategy and forget about day trading. That is why we should do what the brokers do not promote: that is not doing day trading (they promote day trading like crazy).
The typical current cost for the €$ is usually 1.5 or 2 pips for a fixed spread broker. If we choose an ECN account, we will have 0.5 pips approximately. Although we will have to pay the commission that could be 6$ round cost, which means that our real cost would be close to 1 pip.
Forex spread news
Another issue is that there are moments of very high volatility in the markets, when the spread is much higher than normal. Those moments are the well known economic macroeconomic announcements of governments like Non-Farm Payrolls (NFP).
Of course, I do not recommend trading in those moments and much less doing day trading.
We should take into account the brokers usually show us the lowest spread on their webs. But in reality when we open an account we will find out that in many cases that “lowest” spread is not there most of the time. Nowadays we will find that “lowest spread” more often. The competition is huge, and brokers have to improve their offering.
Slippage in Forex
Slippage is a very famous and important concept in forex trading. We should pay close attention to the execution of our orders and see if they have been slipped. We may have negative slippage, when our order is filled at a worst price; or positive slippage, when the order is filled at a better price than that of our previous profit limit order. It could be an important cost, and we should study it from time to time, above all if we often trade. If we see that we do never have positive slippage, and always get a negative one, we should complain to our broker. Or better still, close the account and open a new one in another broker.
Normally, the most liquid the instrument is, the less slippage there will be. If we trade exotic pairs, we should expect high slippage.
The famous Rollover
When we keep our trades overnight, the broker will charge us the so-called rollover. If the currency in which we are bullish has an interest rate bigger than the other, then we will collect the difference.
For instance, if we are long the €$, and the € interest rate is 5%, and the $ interest rate is 2%, the broker should pay us that difference. The opposite if we are bearish.
However, the brokers will normally charge a fee for financing us, so you will pay more when you have to pay, and will get paid less when you have to get paid. In general, it is wise to have a look at the broker´s rollover policy before we open an account.
These are the typical costs for a forex trader. These costs are enough for a novice trader. So, there is no need to buy forex signals or courses for hundreds of €. Almost all significant information can be found in the web for free.
P.S. This is a personal translation from my spanish blog www.brokerparacompraracciones.com.
Thanks for reading and sharing.