Trading the currency market comes with some associated costs. Some investors simply think of all the potential pips they can make, without considering the costs. However, costs play a significant part in trading. Some costs are related to the type of trading account, some to the broker, and some to the region and fiscal regimen the investor lives in.
Depending on the trading style, they all play an essential role in the economy of a trading account. Scalpers (investors that keep trades open for a short time and trade multiple times a day) pay more commissions than swing traders and investors, for instance. However, they rarely pay for swaps. Swing traders and investors, for instance, are concerned about positive or negative swaps, as well as changes in the fiscal spectrum that may affect their investments. Because their positions remain open for a much longer time, changes in monetary and fiscal policies can be a significant cost.
Each currency pair’s quote has two prices: the Bid and Ask price. The difference between them is the “spread”. Currency pairs have different spreads depending on their volatility, liquidity, and the conditions set by the forex broker. The type of trading account and the execution also influence the spread. Because a position must always be squared from the opposite price, the spread is a cost component of every trade; obviously, the smaller the spread, the better.
The commission is a fee charged by the broker for intermediating access to the interbank market. It depends on the volume traded and is charged on every trade.
A swap represents a positive or negative amount added or charged for a position kept open overnight. Based on the interest rate differential that makes up a currency pair, swaps are a big chunk of investors’ strategy. For instance, if investing with a few months of investment horizon, a negative swap affects the outcome of a trade. If it is a losing trade, it will add to the loss. If it’s a winning trade, it will eat away at the profit.
We all have to pay the taxman. Investors too! Depending on the fiscal regimen in the region where the investor resides, taxes play a crucial role in the potential gains of trading on the currency market.
Knowing all the costs associated with trading the interbank market in advance, encourages an investor to make educated decisions.
Besides the costs mentioned so far, other so-called “hidden” costs need to be considered. For instance, the cost for depositing or withdrawing funds to/from a trading account depends on the funding method (e.g. wire, credit card, etc.).
Only after deducting all the costs described here, are investors left with net gains, if any. It is important to remember that brokers are partners to retail investors. It is in their best interest for investors to succeed; an active investor is more valuable than an inactive investor. An investor must do their part, learning the ins and outs of trading the currency market. If any funds remain after everything else is subtracted, the trading business can then continue.
- Trading has adjacent costs to account for
- The regional fiscal policy is as important as the general monetary policy
- A transparent broker is an investor’s partner
- Swaps differ from currency pair to currency pair and from long to short positions
- Commissions depend on the volume traded