There's no such thing as free trading. Every position has a price. While brokers advertise "zero commission" or "tight spreads," the cost is always there—hidden in the bid-ask gap, charged as commission, or deducted as swap. Understanding these three costs (Spread, Commission, Swap) is the difference between calculating real profitability and being slowly bled by hidden fees you never saw coming.
Welcome to Lesson 11
You've mastered Lot Sizes, Pips, and Position Sizing. You know HOW to trade. But here's the reality check:
Knowing how to execute means nothing if you don't know what it costs.
Imagine this scenario:
You're a scalper targeting 10-pip profits. You calculate perfectly: Entry at 1.0850, target at 1.0860, 10 pips = $100 profit per trade (1.00 lot).
You take 10 trades in one day. Win rate: 60% (6 wins, 4 losses).
Your math:
- 6 wins × $100 = +$600
- 4 losses × -$100 = -$400
- Net: +$200 (profitable day!)
Your actual P/L: -$50 (LOSING day!)
What happened? You forgot about costs:
- Spread: 2 pips per entry × 10 trades = 20 pips total cost = -$200
- Commission: $7 per round turn × 10 trades = -$70
- Total costs: -$270
- Net: $600 - $400 - $270 = -$70 loss
You had a winning strategy (60% win rate) but lost money because you ignored transaction costs. Your 10-pip targets couldn't overcome the 2-pip spread + commission.
The Professional Difference: Retail traders focus only on entry and exit prices. Professional traders calculate total costs BEFORE entering and only take trades where the target is large enough to absorb costs and still provide 1:2 R:R. They choose broker models (ECN vs. Market Maker) based on their strategy. Scalpers need 0.5-pip spreads. Swing traders can handle 3-pip spreads. Ignoring costs is amateur. Optimizing for costs is professional.
Lesson Chapters
1Chapter 1: The Cost of Entry - Spread and Bid/Ask⏱️ ~4 min
The most immediate and universal cost in forex trading is the Spread—the difference between the price at which you can buy and the price at which you can sell.
Defining Bid and Ask
Every currency pair quote shows two prices:
Ask Price (Offer Price):
- The price the broker sells to you
- The price you pay when buying
- Always the higher price
- Used for: Buy market orders, closing Sell positions
Bid Price:
- The price the broker buys from you
- The price you receive when selling
- Always the lower price
- Used for: Sell market orders, closing Buy positions
The Gap = The Spread
The Spread Formula
Spread (pips) = Ask Price - Bid Price
Spread Calculation Examples
Example 1: EUR/USD
Quote: 1.0850 / 1.0852
Ask (Buy): 1.0852
Bid (Sell): 1.0850
Spread = 1.0852 - 1.0850 = 0.0002 = 2 pips
Example 2: GBP/USD
Quote: 1.2500 / 1.2503
Spread = 1.2503 - 1.2500 = 0.0003 = 3 pips
Example 3: USD/JPY
Quote: 145.25 / 145.28
Spread = 145.28 - 145.25 = 0.03 = 3 pips
Why You Start at a Loss
The Immediate Cost:
When you BUY:
- Entry: Ask price (1.0852)
- Market: Bid price (1.0850)
- Instant loss: 2 pips
- Dollar loss: 2 pips × $10/pip = -$20 (1.00 lot)
To break even:
- Bid must rise to 1.0852 (your entry)
- Requires 2-pip market movement
- Only then are you at $0 P/L
This is why spread is a COST—you must overcome it before profit.
The Role of Liquidity
Spread size is directly tied to market liquidity:
High Liquidity (Tight Spreads):
- Major pairs (EUR/USD, GBP/USD, USD/JPY)
- London session (3 AM - 12 PM EST)
- New York session (8 AM - 5 PM EST)
- Overlap (8 AM - 12 PM EST): Tightest spreads
- Normal spread: 0.5-1.5 pips
Low Liquidity (Wide Spreads):
- Exotic pairs (USD/TRY, EUR/ZAR)
- Asian session (low volume)
- Sundays (market just opened)
- Late Friday (market closing)
- Holidays
- Spread: 5-50 pips (or more)
Extreme Conditions (Massive Spreads):
- Major news releases (NFP, CPI, Fed decisions)
- First 15-30 minutes after news
- Flash crashes
- Spread: 10-100+ pips
- Avoid trading entirely
Professional Insight: Spread is lowest during London/NY overlap (8 AM - 12 PM EST). This is when most professionals trade. During Asian session, EUR/USD spread might be 2-3 pips instead of 0.5 pips. That's 4-6x higher cost. If you're scalping for 10 pips, a 3-pip spread destroys your edge. Trade when liquidity is highest.
2Chapter 2: Commission - The Alternative Cost Model⏱️ ~3 min
In some broker models, the cost of entry is split between a very tight spread and a separate Commission fee.
Two Broker Cost Models
Model 1: Wide Spread, No Commission (Market Maker)
Structure:
- Spread: 2-3 pips typical (markup included)
- Commission: $0
- Total Cost: Built into spread
Pros:
- Simple (one cost to track)
- No surprise fees
- Good for beginners
Cons:
- Higher total cost for high-volume traders
- Spread is the broker's profit (conflict of interest)
Model 2: Tight Spread + Commission (ECN/STP)
Structure:
- Spread: 0.2-0.8 pips (near raw interbank)
- Commission: $3-$7 per Standard Lot round turn
- Total Cost: Spread + commission
Pros:
- Lower total cost for high-volume traders
- Transparent pricing (see exact spread)
- No conflict of interest (broker doesn't profit from spread)
Cons:
- More complex (two costs to track)
- Commission adds up on high-frequency trading
ECN Commission Structure
Typical Commission:
- $6-$7 per Standard Lot (1.00) per round turn
- Round turn = Open + Close (charged once for both)
Scaling by Lot Size:
- 1.00 lot: $7 commission
- 0.10 lot (Mini): $0.70 commission
- 0.01 lot (Micro): $0.07 commission
Total Cost Comparison
Scenario: 1.00 lot EUR/USD trade, 50-pip target
Market Maker:
- Spread: 2.5 pips = $25
- Commission: $0
- Total Cost: $25
ECN Broker:
- Spread: 0.5 pips = $5
- Commission: $7
- Total Cost: $12
Winner: ECN (saves $13 per trade)
Over 100 trades: ECN saves $1,300!
Professional Rule: High-volume traders (scalpers, day traders) benefit from ECN. Low-volume traders (swing traders, beginners) are fine with Market Makers for simplicity.
3Chapter 3: Swap - The Overnight Interest Fee⏱️ ~4 min
The Swap (also called "rollover interest" or "overnight financing fee") is an interest rate differential applied to positions held open past the market's close time (typically 5:00 PM EST).
The Mechanics of Swap
When you trade a currency pair, you're essentially:
- Borrowing the Quote Currency
- Buying the Base Currency
Interest Rate Differential:
Every currency has an interest rate (set by its central bank). Swap is calculated based on the difference between:
- Interest rate of currency you bought
- Interest rate of currency you sold
Positive vs. Negative Swap
Positive Swap (You GET Paid):
Condition: Currency you bought has higher interest rate than currency you sold
Example:
- Buy AUD/JPY
- AUD rate: 4.35%
- JPY rate: 0.10%
- Differential: +4.25% in your favor
- Result: You receive swap payment daily
Negative Swap (You PAY):
Condition: Currency you bought has lower interest rate than currency you sold
Example:
- Buy EUR/USD
- EUR rate: 4.00%
- USD rate: 5.50%
- Differential: -1.50% against you
- Result: You pay swap fee daily
Swap Calculation Example
Position: Long (Buy) AUD/JPY, 1.00 Standard Lot
Interest Rates:
- AUD: 4.35% annual
- JPY: 0.10% annual
- Differential: +4.25%
Daily Swap (Approximate):
Daily Swap = (Position Value × Interest Differential × Days) / 365
Daily Swap = ($100,000 × 0.0425 × 1) / 365 ≈ $11.64 per day
Hold for 30 days: +$349 in swap payments
Professional Use: This is the Carry Trade strategy—profiting from interest differentials while hoping for favorable price movement.
Triple Swap Wednesday
Special Rule: Brokers charge 3 days' worth of swap on Wednesday (or Thursday, depending on broker) to account for the weekend.
Why:
- Forex market closed Saturday/Sunday
- Interest still accrues over weekend
- Accounted for on Wednesday rollover
Impact:
- Wednesday swap = 3x normal amount
- If normal swap is -$5, Wednesday swap is -$15
- Professional Rule: Close high-negative-swap positions before Wednesday 5 PM EST if planning to avoid weekend hold
4Chapter 4: Fixed vs Variable Spreads and Broker Models⏱️ ~3 min
The type of spread your broker offers is a major factor in choosing a trading partner.
A. Fixed Spreads (Market Maker Model)
Characteristics:
- Spread remains constant regardless of market conditions
- Same spread 24/5 (e.g., always 2 pips)
- Broker acts as counterparty (takes opposite of your trade)
Pros:
- Predictable: Easy to calculate costs
- Simple: Good for beginners
- Guaranteed: Spread won't widen during news (usually)
Cons:
- Often wider: 2-3 pips when variable might be 0.5 pips
- Conflict of interest: Broker profits when you lose
- Re-quotes possible: During high volatility
- Higher total cost: For high-frequency traders
Best For:
- Beginners learning to trade
- Low-volume traders (1-5 trades/week)
- Traders who want simplicity
B. Variable Spreads (ECN/STP Model)
Characteristics:
- Spread constantly changes based on live market liquidity
- Can be razor-thin (0.2 pips) during peak hours
- Can widen dramatically (10+ pips) during news
- Broker aggregates prices from multiple liquidity providers
Pros:
- Tightest spreads: During London/NY overlap (0.3-0.8 pips)
- No conflict: Broker doesn't trade against you
- Transparent: See real interbank pricing
- Lower total cost: For high-volume traders (spread + commission < wide fixed spread)
Cons:
- Unpredictable: Spread varies second-to-second
- Widens during news: Can spike to 20-50 pips
- Commission charged: $3-$7 per lot
- Complex: Two costs to track
Best For:
- Scalpers (need tightest spreads)
- Day traders (high volume)
- Experienced traders
- Professional traders
Broker Model Comparison
| Feature | Market Maker (Fixed) | ECN/STP (Variable) |
|---|---|---|
| Spread | 2-3 pips (fixed) | 0.3-0.8 pips (variable) |
| Commission | $0 | $5-$7 per lot |
| Total Cost (1 trade) | $25 (2.5 pip spread) | $12 (0.5 pip + $7 commission) |
| Execution | Instant (broker is counterparty) | Milliseconds (routed to LPs) |
| Conflict of Interest | Yes (broker wins when you lose) | No (broker just routes orders) |
| Best For | Beginners, low volume | Scalpers, high volume |
Professional Choice: Most professionals use ECN for transparency and lower total costs, despite the complexity.
5Chapter 5: Impact on Trading Strategies⏱️ ~3 min
The three costs must inform your strategy selection and execution.
Cost Impact by Strategy
| Strategy | Holding Time | Spread Impact | Commission Impact | Swap Impact | Recommended Broker |
|---|---|---|---|---|---|
| Scalping | Minutes | Critical (0.5-1 pip max) | High (many trades) | None | ECN (tight spread essential) |
| Day Trading | Hours | Important (1-2 pips ideal) | Moderate | None | ECN (if high volume) |
| Swing Trading | Days/Weeks | Moderate (2-3 pips OK) | Low (few trades) | Critical | Market Maker or ECN |
| Position Trading | Months | Low (even 5 pips OK) | Very Low | Very Critical | Either (check swap carefully) |
Strategy-Specific Guidelines
For Scalpers (5-15 pip targets):
Requirements:
- Spread: Maximum 1 pip (ideally 0.5 pips)
- Broker: ECN only
- Session: London/NY overlap only
- Why: With 10-pip targets, 3-pip spread = 30% cost (unacceptable)
For Day Traders (20-50 pip targets):
Requirements:
- Spread: 1-2 pips acceptable
- Broker: ECN preferred
- Session: Major sessions (avoid Asian unless necessary)
- Why: With 30-pip targets, 2-pip spread = 6.7% cost (manageable)
For Swing Traders (100-300 pip targets):
Requirements:
- Spread: 2-5 pips acceptable
- Commission: Either model works
- Swap: Must calculate (holding for days)
- Why: With 150-pip targets, 3-pip spread = 2% cost (negligible)
For Position Traders (500+ pip targets):
Requirements:
- Spread: Even 10 pips acceptable
- Commission: Irrelevant (few trades)
- Swap: Critical (can exceed profit if negative)
- Why: With 500-pip targets, 10-pip spread = 2% cost, but swap over 30 days can be ±$300
6Chapter 6: Summary, FAQs & Quiz⏱️ ~5 min
Summary & Conclusion
The three costs of forex trading are:
Key Principles (0/5)
The Universal Truth: Ignoring costs turns winning strategies into losing accounts. A 60% win rate with poor cost management loses money. A 50% win rate with excellent cost management makes money.
Frequently Asked Questions (FAQ)
Q1: Is a low spread always better?
Not always. A low spread is better only if it's the true total cost.
Watch out for:
- "Zero spread" accounts with massive hidden commissions
- "Tight spread" Market Makers that profit when you lose (conflict of interest)
- Advertised spreads that only apply during perfect conditions
Professional Check: Calculate total cost = spread + commission for your typical trade. Compare across brokers. The lowest total cost wins, not the lowest advertised spread.
Q2: How can I avoid paying swap fees?
Three Methods:
Method 1: Close Before Rollover (Day Traders)
- Close all positions before 5 PM EST
- Zero swap charged
- Simplest solution
Method 2: Swap-Free Accounts (Islamic Accounts)
- Offered by some brokers (for religious reasons)
- No swap charged
- Often replaced with small administrative fee
- Available to all traders, not just Muslim traders
Method 3: Only Hold Positive Swap Positions
- Check swap rates before entry
- Only hold overnight if swap is positive (you get paid)
- Example: Long AUD/JPY typically pays swap
Q3: What is negative slippage and how does it relate to spread?
Slippage occurs when your order fills at a different price than requested.
Negative Slippage:
- You request buy at 1.0850
- Market moves fast
- Spread widens from 1 pip to 10 pips
- Order fills at 1.0860 (10 pips worse)
- Lost $100 to slippage (1.00 lot)
When It Happens:
- Major news releases (NFP, CPI, Fed)
- Flash crashes
- Low liquidity periods
- Gap openings (Sundays, post-holidays)
Prevention: Avoid trading during news, use limit orders instead of market orders when possible.
Q4: If I buy a Mini Lot (0.10) with a 1-pip spread, how much did the trade cost me?
Calculation:
Cost = Spread (pips) × Pip Value per Lot × Lot Size
Cost = 1 pip × $1/pip × 0.10 = $1.00
Answer: $1.00 cost to enter the trade.
For USD-quoted pairs:
- Mini Lot pip value: $1/pip
- 1-pip spread = $1 cost
- 2-pip spread = $2 cost
- 3-pip spread = $3 cost
Q5: How do I find the swap rates for my broker?
Methods:
1. Broker Website:
- Look for "Swap Rates" or "Rollover Rates" page
- Usually updated weekly
2. Trading Platform:
- Right-click currency pair → "Specification" or "Contract Details"
- Shows Long Swap and Short Swap
- Displayed in pips or dollars per lot
3. Account History:
- Check your closed trades
- Look for "Swap" column
- Shows exact amounts charged/credited
Professional Habit: Check swap rates BEFORE entering any position you plan to hold overnight. Factor swap into your profit target.
Quiz: Spread, Commission & Swap
The Spread in a currency quote is the difference between which two prices?
Which trading strategy is most likely to be negatively impacted by high Swap fees?
If a broker charges a commission, which broker model are they most likely using?
A trader opens a long (Buy) position. Their entry price will be executed at the:
Triple Swap typically occurs on which day of the week?
Call to Action
You now have complete understanding of the financial costs of trading. This knowledge is your foundation for calculating real profitability.
Action Item: Use your Demo Trading Account to observe the difference between a high-commission ECN account and a low-spread Market Maker account. Execute the same trade on both account types and compare total costs. Check the Swap fees for different currency pairs on your broker's website, and observe the swap charged on a Wednesday rollover. Practice calculating total cost (Spread + Commission + Swap) for each trade before execution—this becomes second nature for professionals.
Calculate Your Costs Like a Pro
Practice cost analysis on a demo account. Compare spread types, calculate commission impact, and monitor swap charges. Learn to choose optimal broker models for your strategy and trade during tight-spread sessions. Your profitability depends on cost control.
Deriv
- ✅Zero-spread accounts for tighter entries
- ✅Swap-free (Islamic) available
XM
- ✅Consistently low spreads on majors
- ✅Micro accounts — start with a smaller risk
- ✅Swap-free (Islamic) available
- ✅No trading commission
🚀 Ready to calculate your costs like a pro? Use our exclusive link to open your practice account and compare different cost structures offered by various account types!
Proceed to Lesson 12: Bid/Ask Price and Quotes Explained
Prerequisites
Before studying this lesson, ensure you've mastered these foundational concepts:
Ready to master trading costs and maximize profitability? Understanding spread, commission, and swap is essential for sustainable trading success.
Ready to continue?
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