CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63.00% of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How to reduce expenses in Forex trading

A tip that most brokers don't like to hear about very much

If you visit any page of a Forex broker in our country and in the world, in a few moments you will find out information about his spread, commissions, or swaps. It is important to know these 3 data because the overall profit of the trader is derived from them. However, there is another factor that most brokers will not tell you about, and thanks to which you can potentially save amounts of thousands of dollars a year with the same strategy. Want to know which one? Read on.


Basic expenses in online trading

First, let's summarize in a few sentences the basic expenses that you will encounter when trading Forex online. Both spreads, commissions, and swaps are easily traceable to every broker in the market.
 

Spread

It is the difference between supply (BID) and demand (ASK). If a trader speculates on price growth and thus opens a so-called long position, he opens it (demands) for the ASK price. The moment he wants to close this position, he does so for the price of the BID. In Forex trading, however, it is also possible to speculate on a price drop (so-called short position), in which case the trader opens a position at the BID price and closes at ASK.

 

Spreads Spreads are divided into fixed and variable. This depends on whether the broker determines the difference between the BID and ASK prices themselves or they are reflected on the basis of real market data. Fixed spreads are often offered by brokers operating on the market maker model, and variable spreaders by so-called STP brokers. Trader spreads apply to each trading position.
 

Commission

It is a one-time fee charged by the broker to the trader for opening and closing a trading position. However, unlike a spread, it may not always be charged. It often depends on the type of merchant account that the merchant uses. Usually, commissions are credited by the broker to accounts that offer very low spreads on the interbank market. The commission is paid by the trader only on certain trading accounts.
 

Swap

This fee is added to any position the trader holds overnight. That's precisely when the so-called rollover of trading positions to the next trading day takes place. The uniqueness of swaps also lies in the fact that they can be either negative (you pay the fee) or positive (the fee is paid by the broker to you).

What is slippage and how it can help us save capital?

Slippage is the difference between the price at which a trader wants to execute his trade and the price at which a broker actually executes that trade. There will always be a certain, albeit very short, time between clicking on the button to open/close a trade (or its execution through stop-loss, take-profit, and other so-called pending orders). How long it takes and what happens during it then determines the size and nature of the slippage.

 

Negative vs positive slippage

As in the case of swaps, slippage also has a positive version. If your trading position is realized at a more favorable price leading you to earn slightly more, that’s a positive slippage. For the negative, it is just the opposite.
 

How is slippage affected by the quality of the broker

Forex trading takes place online, that’s why a very important indicator of a broker’s quality is the so-called trading infrastructure. It encapsulates, what technologies the broker uses, how good his business servers and liquidity providers are. In short, how fast the broker is able to get your trading order to the interbank market and how good a counterparty it is able to connect it to. In essence, the better the broker, the less chance of negative slippage (there are exceptions in the form of trading slippage during extreme market fluctuations, but we will omit these for this case).

Letting traders experience positive slips is one of the indicators of the broker's quality

 

How slips affect a broker model

There are 2 basic divisions of broker models:
  • STP a
  • MM (Market Maker)


The broker based on the STP model is just an intermediary between your order and its match on the real (interbank) market. The quality of an STP broker is determined (in addition to its trading infrastructure) also by its liquidity provider. That is the intermediaries to which the broker sends your orders for pairing. Thus, a broker operating on the STP model cannot intentionally affect the slip. However, the quality of its services can match you with a certain counterparty so quickly that slippage occurs in a really small percentage of cases and sometimes the slippage ends up being positive.

On the other hand, a broker based on the MM model usually does not send your orders to the interbank market and takes up the role of the necessary counterparty himself. Therefore, theoretically, he has the opportunity to determine with what degree of response orders will be processed, and thus whether they will slip or not. Although nowadays Forex brokers are often subject to strict regulations, similar cases have occurred in the past.
 

Ask your broker for slides, if they are fair, they will be happy to tell you about them. Purple Trading slide statistics can be found here.

Positive slippage and its effect on trading expenses


Enough theory, let's give one practical example for all:


If the broker enables you to trade the EUR / GBP currency pair for 1 pip. (ie 1 lot EUR / GBP for 10 EUR), it can still be only half the truth. That's because of the slippage that the broker didn't mention.

Suppose that each of your inputs and outputs is affected by a slip of 0.5 pips (each of the trade inputs and outputs is realized with a price of fewer than 0.5 pips). As a result, it makes a total of 10 EUR for 1 standard lot of EUR / GBP. This is money that is "lost" due to a negative slippage.
 

Let's extrapolate this result to the year-long trading activity and compare the result of trading without slips and with slips:

 

With slip
2 realized lots per day x 20 EUR / 1 lot (slippage for each transaction) x 260 days = 10,400 EUR
 

VS Without slip
2 realized lots per day x 10 EUR / 1 lot (without slippage) x 260 days = 5 200 EUR

Difference: 5200 EUR
 

This is, of course, an extreme example. In reality, it will never happen to you that slippage will occur in each of your trades. Normally, both negative and positive slippage occurs, but the extent to which they occur (and whether they are positive) is what determines the quality of the broker. We, therefore, recommend that you pay attention to this attribute, whether you already trade with a broker or you are in the middle of choosing one.

Let's open an account and trade with us!


Your capital is at risk.

FAQ

ASK
Show answer
The offering price on the market for which the buying positions are executed and selling positions are closed. It is higher than BID price.
BID
Show answer
Bidding price on the market for which the selling positions are executed and buying positions are closed. It is lower than ASK price and the chart displayed in MT4 is based on this price.
 
Pip
Show answer
The price expression of currency pairs based on the one-before-last decimal of the quoted price. If the price of EURUSD currency pair changes from 1.17455 to 1.17465 then the price changes by one pip. The same way, if the USDJPY price changes from 110.124 to 110.114 a change by one pip occurs.
Slippage
Show answer
A slippage in order filling. It expresses the difference between the asked price at trader’s side and the price at which the order is executed in the market (in market execution, it is the best available price in the market at that time). Slippage can have positive as well as negative value.

 
Spread
Show answer
Price difference between ASK and BID prices.
Swap
Show answer
A fee charged for holding a trading position overnight. It is expressed in points or percents and it is directly proportional to the volume of the trading position held. Please note the Swap is being charged 3x on Wednesday night, which includes also the weekend swaps.