Spreads and trading costs – what you really pay to trade forex and CFDs

Costs are the one part of trading performance you can predict. A strategy that barely breaks even before costs will lose after them, so it pays to understand every line.

#The spread

Every quote has two prices: the bid (where you can sell) and the ask (where you can buy). The difference is the spread. If EUR/USD is 1.13500 / 1.13508, the spread is 0.8 pips. You pay it once per round trip: buy at the ask, sell at the bid.

Spreads are not fixed. They widen:

• around the daily rollover at 17:00 New York time (23:00 in Central Europe);
• when markets open on Sunday evening;
• around major news such as central-bank decisions and US jobs data;
• on less liquid pairs such as EUR/HUF or EUR/TRY, and outside the main trading sessions.

Compare brokers on average spreads over the times you trade, not the minimum spread in an advert.

#Commission

Raw-spread or ECN-style accounts show near-interbank spreads and charge commission per lot, often quoted "per side". A commission of $3.50 per side is $7 per round-turn lot, the equivalent of 0.7 pips on EUR/USD. Standard accounts build the cost into a wider spread instead. Which is cheaper depends on the numbers – run both through the trading cost calculator.

#Overnight financing (swap)

Positions held past the daily cut-off are charged or credited financing. For currency pairs it reflects the interest-rate difference between the two currencies plus the broker's mark-up; for index, share and commodity CFDs it is usually a benchmark rate ± a mark-up of 2–3% a year. Wednesday night typically carries three days of FX swap to cover the weekend.

#Costs people forget

• Currency conversion when you trade instruments in a currency different from your account. Some brokers charge 0.3–1% on conversions.
• Deposit and withdrawal fees, especially for cards or e-wallets.
• Inactivity fees after months without trading.
• Market data fees for real-time exchange data on some platforms.
• Guaranteed stop-loss premiums.

#Read the MiFID II costs disclosure

EU brokers must show the costs of a product before you trade and send you an annual statement of costs and charges in money and as a percentage. For CFDs, the Key Information Document (KID) shows cost examples. These documents are dry but honest: they include costs that marketing pages tend to leave out.

#A worked comparison

Trading 40 round-turn lots of EUR/USD a month:

Here the raw account wins slightly; with a 0.9-pip standard spread they would be equal. The point is to do the sum with your broker's numbers.