What are the costs of Forex trading?
The costs of Forex trading are not always clear because they are often specified in rather technical terms. In this article we provide a clear and transparent image of the costs involved with Forex trading so you know what you are up to.
The costs of Forex trading Forex largely consist of the spread. The spread reflects the amount of money you have to pay the broker when opening a position. By the way, you only need to pay this amount once. You don’t have to pay the spread again when you close the position.
But what is the spread actually? The spread is the difference between the buying and selling price and is the source of income for the broker. At Plus500 for example, the spread on the EUR / USD amounts to 0.0002 cents per unit. You can calculate the spread for each instrument yourself by subtracting the selling price (for example 1.3192) from the purchase price (e.g. 1.3194).
The spread is the amount you pay per traded unit. For example, if you buy EUR / USD for €10,000 the total costs amount to 10,000 X 0.0002 = 2 euro. So when you open the position you will start with a loss of 2 Euros in this case.
Finally, Forex trading includes certain financing fees. You can trade via a leverage with many modern brokers. Over the total value of the position (the money you actually invested multiplied by the leverage) you pay a small daily financing interest.
For each currency pair you wish trade you can easily calculate what the financing charges would be. The broker Plus500 allows you to look up these percentages for each trading instrument. Accordingly, the amount you pay per day equals the percentage divided by 365 times the total value of the position as it is opened.
I will illustrate this through an example. We had an open position of 10,000 EUR / USD. At Plus 500 the financing interest on this currency pair equals 0.0133 percent per day. In total, the transaction costs amount to 0.0133 X 10,000 = €1.33 per day. Because the financing charges increase as time passes, Forex trading is recommended for short to medium term trading. (1 day – 1 year)
Let’s have a look at the overall picture, including the transaction costs. Imagine you opened a position of 10,000 EUR / USD and the price rises from 1.3192 to 1.3341. Per Euro invested we see an appreciation of 0.0149 which represents a total profit of 10.000 X 0.0149 = 149 Euros. On average the EUR / USD moves 1 cent a day, so let’s assume you’ve closed this position within five days.
You will have paid a spread of 2 Euros and five times the financing charges of 1.33 which equates to a total of 6.65. In total, the costs of this trade amount to €11.25 which is equivalent to 11.25 / 10.000 X 100 = 0.1125 percent!
All in all, we can conclude that Forex trading is cheap and profitable. You pay financing interest only if the position is open longer than one day. So, the shorter you hold your position, the lower your total costs will be. And because the transaction costs are always related to the size of the position, you can make money regardless of the size of the position. In comparison: many traditional brokers charge a fixed amount per transaction, which makes trading with these brokers beneficial only if you trade on the long run (>1 year) or with very large positions.