Andrew Carnegie, the legendary Scottish-American industrialist, once said, “Watch the costs, and the profits will take care of themselves.” Of course, things aren’t so simple, particularly in the world of currencies.
Yet, this quote emphasizes that trading is a business, and like any venture, there are costs involved. This is something to expect as we deal with brokers who are, first and foremost, financial service providers.
Fortunately, there aren’t too many commissions and fees to be cognisant of in forex. However, it’s still important to understand each of these and how they affect your trading and overall user experience.
Spreads/commissions
Spreads or commissions are the primary cost of trading forex. The higher your positional volume and frequency, the higher the spreads/commissions. While these don’t show up as actual fees on your statements, they are present in every order.
As we know, the spread is the difference between the bid and ask price. In simpler terms, a spread is simply the mark-up your broker adds on every trade for sourcing liquidity from an external liquidity provider.
Brokers have two structures in this regard; charging a spread or a commission. The latter model is typically where the broker sources prices externally or essentially from the interbank market.
The spreads in this regard are variable, meaning they fluctuate according to market conditions. For the commission model, this is usually when the broker is a ‘market maker’ or ‘dealing desk,’ meaning they derive their offered prices directly from their own liquidity provider.
Typically, the broker in question charges a fixed spread for most of the day and a small commission per order, the latter of which does reflect on your order ticket. Fortunately, spreads and commissions are some of the lowest in forex compared to other markets.
Frequently traded pairs, namely your major and minor pairs, attract the lowest spreads (normally not over three pips for most of the trading day), which is one of the reasons they are so popular.
Conversely, less heavily-traded instruments, namely exotic pairs, have the highest spreads, meaning they have lower volume. So, traders interested in these markets would consider a broker using a low-spread, small-commission model to minimize these costs.
The times at which one trades also impact the extent of spreads/commission. Usually, spreads are at their highest at the start of certain trading sessions, rollover periods, and high-impact news events.
Swaps/rollover fees
A swap is the interest traders pay or are rewarded with for holding or ‘rolling over’ positions overnight. This fee exists because of leverage. When we trade on margin, we are opening much bigger positions than we could normally.
This means the number of currencies being traded is effectively being borrowed from the broker. As with most ‘loans,’ interest is involved. However, the interest in forex only applies if you hold a position overnight and is charged or credited for every day thereafter.
Only long-term traders should worry about swaps since this group does maintain their orders for several days to even weeks and years, depending on the strategy.
Generally, swaps for most markets are negative, meaning you are likely to have some money deducted from your account for any order held overnight. Fortunately, these fees aren’t so hefty for the majority of major and minor pairs.
Yet, it’s a different story if you’re trading exotic markets. Due to the noticeable interest rate differentials between emerging and developing economies, you may pay a large swap (or be credited with interest) depending on the trade direction.
Other than shopping around for brokers levying the lowest swaps, there’s no foolproof method to reduce swaps drastically. A special type of account known as a swap-free or Islamic account is offered to Muslim clients due to their faith prohibiting earning or paying off any interest.
Most brokers are strict in only providing this option to real Islamic traders who can verify their religion.
Deposit/withdrawal fees
Over the past few years, many brokers have provided fee-free deposits and withdrawals. Yet, there might be instances when fees do apply in this regard, such as if you’re funding and withdrawing through bank wire or even cryptocurrencies.
For funding purposes, traders will want only to deposit using a debit/credit card (VISA, Mastercard, etc.) or an e-wallet service like Skrill or Neteller. These often don’t incur fees from the broker. Even on the processing side, the cost is often too insignificant.
You’ll want to avoid funding with bank wire and a cryptocurrency like Bitcoin and Ethereum, as these are known to have high fees. There is less flexibility with withdrawals as, after a certain threshold, brokers will always process these through a bank account (unless it’s an anonymous or no-KYC broker).
In this regard, you should check if the broker levies a charge for the withdrawal and find out the processing fees from your bank, as these can vary wildly.
Conversion fees
Fortunately, this charge is the least common and is quite simple to avoid. A conversion fee applies when the currency you’re funding with is different from the base currency of your trading account.
For consistency, traders should deposit using the same currency as their account. For instance, if your account is denominated in USD, ensure you’re funding with USD. Fortunately, some brokers provide several other base currencies (as USD is the most common) for a wider choice.
These two methods represent the ways to avoid conversion charges.
Inactivity fees
Inactivity fees apply monthly after a specific period where no activity has occurred on a funded trading account.
Traders should never have multiple funded accounts with different brokers, as it’s easy to forget where you may or may not have some money left with a broker. Fortunately, many brokers don’t levy this fee, but it’s still something worth observing.
Final word
Ultimately, like any business, not paying attention to the costs involved in trading can affect the extent of your profits. Broadly speaking, we can class fees as compulsory and optional.
For the former, we have spreads/commissions and swaps. These are unavoidable, but there are various methods of reducing them. While optional costs aren’t entirely non-compulsory (deposit/withdrawal fees, conversion, and inactivity fees), they are simple to avoid with the proper knowledge.
