The cost of trading Forex isn’t always clear because it is shown in pretty technical terms. In this article we explain what the costs of trading in Forex are, so you know what you’re getting into.
Spread determines the price
The biggest cost comes from the so-called spread. The spread shows the amount you pay when you open or close a position. You only pay the spread once, closing a position you don’t pay the spread again.
But what is the spread? The spread is the difference between the buy and sell price and forms the source of income of the broker. With Plus500 the minimum spread on the EUR/USD pair is, for example, 0.00006 cents (0,6 pips, measured on the 29th of march 2018) per traded unit. In general you can calculate the spread by subtracting the purchase price (e.g. 1.3914) from the sell price (e.g. 1.3192). Do note that the exact spread can change!
This spread is the price you pay the broker per traded currency unit. If, for example, you open a buy position EUR/USD for 10,000 units, your total spread will be 10,000 x 0.0002 cents, which comes to 2 euros. When you open the position you start out with a loss of 2 euros.
Last but not least, we have finance costs when trading Forex. With modern brokers you can trade using leverage where the broker pays most of the purchase amount. You pay a slight financing interest over the total value of a position.
Per currency pair you trade in, you can simply calculate what you’ll pay in fees. With broker Plus500 you can look up the percentage per trading product. Now multiply the percentage you pay per day you have your position open. Here is an example to clarify.
We opened a position of 10,000 EUR/USD. With Plus500 the financing interest on this currency pair is 0.0185 percent per day. In total you pay 0.0185 x 10,000 = 1.85 per day. Needless to say, it’s best to trade fast and focus on the short term when trading Forex.
Note: Over the weekend you pay interest for both Saturday and Sunday. The markets are closed which means you are unable to close your positions.
Let’s take another look at the fees. Let’s say you open a position of 10,000 EUR/USD and the price goes up from 1.3192 to 1.3341. Your investment now goes up by 0.0149 per unit, a total profit of 149 euros. On average, the currency pair EUR/USD moves 1 cent per day. Let’s say you close your position within 5 days.
You’ve already paid the spread of 2 euros and you must also pay 5 times the financing fee of 1.85, which comes to 9.25. In total, the costs are 11.25, which comes to 0.1125 percent!
Trading Forex cheaply?
All in all we can conclude that trading Forex is pretty cheap. You only pay financing costs when your position is open for more than a day. Because the transaction fees in the form of the spread always correspond to the size of your positions, you can make money regardless of your stake.
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