“Online Trading Costs“
> Explanatory Article by Marios Kyriakou, MSc Economics
About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.
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<Last updated 16.04.2020>
Hi! If you are interested in online trading you should read the below that provides important information about the transaction costs involved.
Trading costs are charges for transactions taking place from your side as a client. These are Commissions, Spread and Swaps.
Cost of Trading
The cost of trading is the overall expense that a trader has to pay in order to run their trading business. Costs vary from broker to broker,
Opening an account is quite a straightforward process and done in a step by step process. For the account setup there are usually no fees/costs.
In case the account remains inactive for a long period of time, usually 90 days, a monthly fee is deducted from the account balance ( > inactivity fee).
Other account related fees
Conversion fees > Conversion fees apply when your account currency is different than the quoted currency of the underlying asset you are trading.
(Based on the current exchange rate).
Withdrawal Fees > A withdrawal fee is the fee you incur when placing a withdrawal. Usually, Brokers do not charge any withdrawal fees but you may be charged bank transfer fees. For withdrawals equal to a very small amount, the Broker will charge a small fee. The same fee applies for bank wire withdrawals of small amounts.
A pip is the second smallest increment in any currency pair. Pip value is calculated by taking the amount of currency (or lots) multiplied by the price change of the currency pair converted into the trader’s account currency.
Example: 1 lot USDCHF
100,000 (1 lot) x 0.00010 (1 pip) = 10 CHF pip value
Conversion to USD with example USDCHF rate (0.794) = 12.58 USD > If this is the difference (0.00010) between the opening and closing price when trading 100,000 units then it is the PnL generated from that position.
To understand the term spread is by thinking of it as the fee your broker charges you to trade, to open a position. It is the difference between the BID and ASK price.
> If Spread in PIPs is 1 pip, then PIP value = 10 USD. Opening 2 lot will have a spread charge of 20 USD.
> If XAU/USD(Gold) for example has ASK price 1,800.50 and BID price 1,800.00 per oz, then the spread is 0.50 USD and so the charge for opening the position.
The spreads are usually variable, meaning that they can be higher or lower depending on the market conditions and account type.
Spread and Asset Classes
It is important to understand what we see on the market watch in regards to prices and spreads. The difference in BID and ASK relates to the amount below and is determined by the lot size (i.e. 1 lot Gold = 100 oz)
-Forex > EURUSD: 1.20000 It is the price per 1 unit of EUR in terms of USD.
-Metals > XAUUSD: 1,900.10 It is the price per 1 oz Gold in terms of USD.
-Indices > US30: 30,100 It is the price per 1 index in terms of USD.
-Energy > OILUSD: 42,00 It is the price per 1 barel of Oil in terms of USD.
-Shares > EBAY: 49,00 It is the price per 1 E-Bay share in terms of USD.
A commission can either be a fixed fee or a relative fee – the higher the trading volume, the higher the commission. A commission is similar to the spread. It is charged on every position opened. Usually, Brokers charge a “relative fee” type commission. The amount a trader is charged is based on trade size; for example, the broker may charge “$x per $million in traded volume”, or x dollars per lot and so on.
i.e. Charge is 2 USD
> When opening 1 lot AUS_200 index
Volume Traded and Commission
Example Commission charge: For FOREX = 9 USD per 1 round lot (both IN and OUT)
> This means, charge is 4.5 USD for 100,000 IN and 4.5 USD for 100,000 OUT
This means charge is 9 USD per 1 lot position (200,000 units traded)
When trades are held overnight the swap, o rollover cost should be factored in by the trader holding the position. The difference between the two interest rates of the currencies you are trading will give you the cost of holding the position overnight. These rates are not determined at the Interbank level.
The broker can add a markup on the Swap charge, that is why swaps are different than the interbank level and from broker to broker. A swap can be a Charge(negative) or a pay (positive) to the client depending on the interest rate differential.
Forex/CFD cash products have no expiration. They should normally roll over to the next day by closing the position at midnight and re-open (manual rollover).
> Position Long EURUSD > 100,000 units bought. Closes at Price 1.17500. Re-Opens at Price 1.17510. Price difference = 0.00010 since the position re-opened higher by 1 pip. So rollover charge is 10 USD = 0.00010 x 100,000.
Rollover/Swap charge in MT4 usually is depicted in MT4 points. Example > Long swap = 10 which means 10 points = price difference 0.00010 for EURUSD.
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