Countless traders focus on the inevitable losses they’d experience naturally in their accounts as the real trading costs, and rightfully so. However, there are other costs which can also have a bearing on the ‘cost of doing business’ in forex. Ultimately, trading is a business, and like any business, we have to factor in costs that might affect profitability in the long run.
Most of these costs are public knowledge, though this fact doesn’t take away the simple truth: traders have to understand them on a deeper level. The one caveat here is that some of these costs may affect some less severely depending on their trading style and strategy. Nonetheless, it’s beneficial still to learn them with the end goal of reducing fees.
Spreads and commissions are the number one trading cost merely because traders experience them whether a trade is profitable or not. Even if a position is closed after one second of being opened, it’s highly likely to incur a spread. Since these are the most recurring trading costs, brokers use various marketing campaigns to advertise low spreads to attract clients.
In most cases, this practice is beneficial to them. However, the discrepancy between the spreads can vary widely depending on the broker, the trading account, and, equally importantly, the currency pair. Countless brokers have offered relatively cheap spreads on major and minor pairs in recent years.
Therefore, there aren’t as many brokers offering unusually high spreads, unless they are market maker brokers. Most of the so-called STP (straight-through processing) brokers provide competitive spreads. So one of the first steps for traders to reduce spreads is staying away from most market maker brokers.
The trickiest part with spreads is as they tend to be variable, they can widen dramatically during quieter trading and high-impact news periods. However, longer-term traders shouldn’t worry as much with spreads widening.
Other tips to lower spreads:
- High-frequency traders could benefit from focusing on very liquid and mass-traded currencies, which are the major pairs and most minor pairs. Brokers also offer zero spread accounts that charge a commission per trade, which solves the problem of not worrying about widening spreads.
- Exotic pairs are known for having excessively high spreads. In most cases, it makes sense for longer-term traders to trade such pairs, meaning other traders should generally refrain from them.
Commissions don’t apply to all the trading accounts, and there’s still ongoing criticism of whether brokers should levy this fee. Commissions are similar to spreads in that they apply to every position regardless of its outcome. In a standard trading account with no special features, a broker isn’t supposed to charge any commission, and this is something that one needs to consider.
Commissions are more common on special types of accounts like zero spread accounts. Traders must always compare commissions against a reasonably large sample size of brokers to find the most reasonable because they can be surprisingly costly. Inevitably, there will be variances across different pairs, which is another element that one needs to note.
The swap fee refers to the positive and negative interest rate differentials between the base and the quote currency in a pair. These fees are either credited or incurred daily for any positions held overnight.
Unfortunately, there is no universally adopted standard calculation for swaps, meaning some brokers can charge exorbitantly higher swaps than usual. Swaps aren’t of concern to traders who don’t hold trades overnight, but they are worth considering for those who have them for several nights.
Swap-free accounts are now widespread, though brokers usually reserve them for Muslim clients in keeping with their Sharia law. Numerous brokers have been less stringent in this regard by offering this account to non-Muslims. Despite that there may be additional terms and conditions.
Funding and withdrawal fees
Most brokers have provided fee-free funding on some of the funding and withdrawal methods they avail to their customers. Generally, funding with a VISA or Mastercard card is the quickest way and hardly ever incurs any fee from the broker (except possibly from the payment processor). Therefore, traders should use this method to fund their accounts instead of something like a bank wire that usually incurs a considerable fee. Regarding withdrawals, traders should stick with brokers that don’t charge here.
This fee is levied by a broker when a client hasn’t traded on their account for a specified period. Many traders, especially at the beginning of their careers, may open numerous live accounts with different brokers and naturally forget to close them. After thorough consideration, it’s critical one chooses and sticks to one broker while closing any live accounts they may have with other brokers.
Although it isn’t a vast majority that charge inactivity fees, it’s a fee worth observing especially if one’s looking to open a few live accounts with different companies. Brokers who charge this fee would do so in a live account with funds, making it extra important to ensure a trader chooses one broker to use. If they need to open a few live accounts, they must be mindful of the inactivity fees.
Other costs to consider
While taxes don’t come directly from a trader’s broker, in most countries, forex income above a predetermined threshold is usually taxable. What typically happens is, assuming a trader becomes profitable, their initial withdrawals come through the original funding methods they used. Once the trading profits exceed their withdrawals, virtually all brokers require the client to do a bank wire transfer.
Banks process the withdrawals, though in most cases, the tax authorities in many countries can still see these transfers when necessary. Therefore, when a trader becomes profitable to a substantial point, they must understand the taxation laws in their nation to either pay the tax or use legal ways to minimize it.
A perfect broker should only charge the spread or a commission per trade with reasonable swap rates (if applicable) and no fees for depositing and withdrawing. This statement summarises that all traders need to have minimal trading costs in the long run.