Trading is not free. Every position you open pays something to somebody, and those payments come out of your results whether the trade wins or loses.
Beginners routinely underestimate this. A method that looks profitable on paper frequently is not, once costs are applied honestly.
Bid, ask and the spread
At any moment a market has two prices:
- The bid is the price at which you can sell
- The ask, sometimes called the offer, is the price at which you can buy
The ask is always higher, and the difference between them is the spread.
If EUR/USD shows a bid of 1.0850 and an ask of 1.0851, the spread is one pip. Buy at the ask and you are immediately down one pip, since closing means selling at the bid. The trade starts negative and has to recover the spread before it makes anything.
What affects the spread:
- Liquidity. Heavily traded instruments have tighter spreads.
- Time of day. Spreads widen when the relevant market is quiet, particularly outside main sessions.
- News. Spreads can widen dramatically in the seconds around a major release.
- Account type. Some accounts carry wider spreads and no commission, others raw spreads plus a commission. Compare the total, not one component.
Commission
A commission is a direct fee per trade, usually charged per lot or per contract and usually charged both to open and to close.
Futures trading is almost always commission-based, with additional exchange and data fees. CFD accounts vary, and many index and forex CFDs are priced through the spread with no separate commission.
A commission is easier to evaluate than a spread because it is stated plainly, which is part of why some traders prefer commission-based accounts.
Swap
A swap, also called a financing or overnight fee, applies when you hold a position past the daily cutoff, usually 5pm New York time.
The mechanism differs by product:
- On CFDs, you are charged or occasionally paid interest based on the difference in interest rates between the two sides of the trade, plus the broker's own markup. Holding a large position for weeks can cost a meaningful amount.
- On futures, no overnight swap applies, because the financing cost is already built into the contract price. This is one of the real structural differences between the two products.
Many brokers charge triple swap on one day of the week to account for the weekend (usually Wednesday).
Close your positions within the session and swaps never apply to you.
Slippage
Slippage is the difference between the price you expected and the price you received.
A market order fills at the best price available at the moment it reaches the market, and that price can change between your click and the execution.
- Usually small in liquid markets during active hours
- Grows during news events, at session opens, and in thin markets
- Can work in your favour as well as against you, although negative slippage is more common, since the moments when price moves fast are the moments when everyone is trying to transact at once
Slippage also affects stop losses, since a triggered stop becomes a market order. Your realised loss can exceed your planned loss. This is a known limitation of the order type rather than a malfunction.
Putting the costs together
Take a scalping method targeting eight points per trade on an index, with ten trades a day.
- Spread of one point in and effectively one point out
- Commission of a fraction of a point each way
- Occasional slippage of a point on entries around fast conditions
The method needs to overcome roughly two to three points of cost on an eight point target, which is a third of the move, before it has to be right about anything.
That arithmetic explains why high-frequency approaches are much harder than they look, and why costs are the part of a trading education that deserves the most attention and gets the least.
Key terms
- Bid: the price at which you can sell
- Ask: the price at which you can buy
- Spread: the difference between bid and ask
- Commission: a direct per-trade fee
- Swap: a financing cost for holding a position overnight
- Slippage: the gap between expected and executed price