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Spreads and Swaps

Understanding the transaction costs with trading

What are forex spreads?

At the beginning of your trading, you will notice that you are given a ‘bid’ (or ‘sell’) price and an ‘ask’ (or ‘buy’) price. Therefore, the price at which you sell base currency is a ‘bid’ and the price at which you buy the base currency is ‘ask’ and difference between the two prices is ‘spread’.

When a trade is opened, there are always third parties, such as a bank or liquidity supplier, who facilitate the opening and closing of that trade. Such third parties must maintain an orderly flow of purchase and sale orders, which means they must find a buyer for each seller and vice versa.

The third party assumes the risk of loss when facilitating trade, so the reason the third party keeps a portion of each trade is called the spread!

How do you calculate the spread?

The measurement of spread is done in 'pips' itself, which is a currency pair's smallest unit of price movement. So in the example below, the distribution is 0.2 Pips

How do you calculate your transaction cost?

You take the spread and pip value and multiply it by the number of lots that you are trading in order to determine the cost of trade itself (not including options, commissions, etc.) :

Trade Cost = Spread X Trade Size X Pip Value

For example:

1.2 pips spread is there for a trade you have opened. Therefore, here you are trading with mini lots which is 10,000 base unit.

Value of pip is $1, therefore the transaction cost is $1.20.

As you know, the bigger the trade is, the more transaction costs will be there.

What are Swaps?

Swaps are an interest charge that traders have to pay to hold a position open overnight. In order to keep the position open, trader will pay interest on currency sold and receive interest on currency bought. The swaps are therefore derived from the currency pair countries ' interest rates, whether the trader goes long or short, and the current market conditions.

Important Swap/Rollover Rate Facts

Swap rates are applied at 00:00 platform time.

Each currency pair is measured on a standard size of 1 lot i.e; (100,000 base units) and also it has its own swap charge.

Swaps are applied to your open positions each night and a new ' value date ' is issued when the position is left open.On Wednesday night, however, the new value date for a trade held open is changed to Monday. Due to this, swaps are charged at triple the rate.

Check your MT5 Market Watch panel swaps. Only right-click, select ' symbols, ' select the method, then select ' Properties.

Trading Conditions to Enhance Your Success

When you begin your trading career, the use of Leverage & Margin and how the Leverage defines the necessary margin are two of the most fundamental concepts for you to understand.

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