“Transaction Costs (Spread/swap/comm.)

 > 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>

Dear reader,

Hi! If you are interested in online trading you should read the below that provides important information about the transaction costs involved.

 

Transaction costs are charges for transactions taking place from your side as a client. These are Commissions, Spread and Swaps. First, lets talk about the calculation of Profit and Loss when using pips.

 

Pip Value

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.

 

Commission

Brokers charge commission for transactions taking place.

A position involves two transactions taking place. IN and Out.

IN: the amount bought/sold when taking a position in the market.

OUT: the amount sold/bought when closing the position in the market.

 

Volume Traded and Commission

The amount traded including both IN and OUT.

Example Commission charge: For FOREX 9 USD per 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)

 

Volume Traded and Spread

Spread is the Price Difference between the ASK and BID price. ASK is the price used for buying and BID is the price used for selling. Spread charge includes both IN and OUT.

Example Spread charge:

EURUSD ASK price: 1.12020

EURUSD BID price: 1.12010

Spread= ASK-BID = 0.00010

Buying at the ASK price 1.12020 and selling at the BID price 1.12010 (which is lower), 100,000 units of currency will result in 0.00010 x 100,000 = 10 USD charge.

> This means that as soon as the position opens this will be the charge >unrealized Profit/Loss generated by the current market BID price.

The spread is not always fixed or always floating. The type of spreads that you’ll see on a trading platform depends on the broker and how they make money.

There are two types of spreads:

1)Fixed

2) Variable (also known as

 

Rollover/Swap

Rollover is the interest paid for holding a position overnight. The Rollover allows a trader to hold a position. Forex/CFD cash products have no expiration. Normally contracts should normally rollover to the next day by closing the position and re-open (manual rollover). In the CFDs case there is no delivery of the actual asset.

Since forex is traded in pairs, every trade involves not only two different currencies, but also two different interest rates. Rollover is also called Swap. The interest rate differential between the two currencies involved in the pair you are trading.

Example of Rollover Calculation:

> 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.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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