Understanding Trading Costs in Forex

Understanding Trading Costs in Forex

For those that are trading with any level of consistency, forex trading costs quickly become an essential factor to consider when determining profit and loss potential for any trade.  Of course, trading costs are going to vary greatly depending on the type of trading strategy you regularly employ.  But it will be important to take an assessment of the overall trading costs that you will be encountering as this will always become a significant drag on the ability of your account (and strategy) to sufficiently maximize profits.

Differential Spreads

When we look at the biggest contributor to trading costs, the first place to look is at your spread costs.  Some brokers offer fixed spreads while other offer variable spreads.  There are critical differences here, as news traders will inevitably be forced to pay much wider spreads than will those using other types of strategies.  For these reasons, it makes sense for news traders to find forex brokers that offer fixed spreads during all market conditions.  According to a recent report from Teach Me Trading, a growing number of forex brokers have started to offer fixed forex spreads in the last few years.  So this is good information for those that will be more likely to trade during periods of enhanced volatility in the forex markets.

Long-term Vs. Short-Term Trading

Another factor to consider when determining your forex trading costs is whether or not you are a long-term trader or a short-term trader.  Since trading costs accumulate every time you open and close a position, the trader with more established positions is inevitably going to encounter a much larger number of trading costs.  For these reasons, those that are looking to reduce spread costs and trading costs might want to consider using longer term position strategies.

This will allow you to capture many of the same gains that you would be seeing otherwise, but at the same time you will not be opening as many positions in doing so.  This is not to say that you should use long term strategies if you have a great deal of success as a short term trader.  Of course, you should do whatever works best for you in generating profits.  But it is important to remember that if trading costs are becoming an issue for you, it would be a good idea to consider lengthening your time frames so that you are not opening and closing as many costly positions.


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About the Author
Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. Trade ideas are generally suggestive of time horizons of one to six months.

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