Every time you place a trade, you pay a cost. Understanding that cost — and how to minimize it — directly affects your profitability.
The most visible cost is the spread. The spread is the difference between the bid price (what you can sell at) and the ask price (what you can buy at). If EUR/USD shows a bid of 1.0850 and an ask of 1.0852, the spread is two pips.
When you open a buy trade, you enter at the ask (higher price). To break even, the market needs to move up by the width of the spread. On a two-pip spread, you start every trade two pips in the red. This is your broker's primary revenue source.
Spreads are not fixed. They vary by currency pair — EUR/USD typically has the tightest spread (0.1 to 1.5 pips), while exotic pairs can have spreads of five to twenty pips. They also vary by time of day — tightest during London and New York trading hours, widest during the Asian session and around market open/close.
Some brokers offer two account types. Standard accounts have wider spreads but no commission. ECN or raw spread accounts have very tight spreads but charge a separate commission per lot — typically five to seven dollars per round trip. For active traders, the ECN model is usually cheaper overall.
Beyond spreads and commissions, there is the swap — the overnight financing charge. If you hold a position past 5 PM New York time, you pay or receive a swap based on the interest rate differential between the two currencies. Swaps can be significant for positions held for days or weeks, and they vary widely between brokers.
Here is a practical tip: before you trade, calculate the total cost. Add the spread cost plus any commission plus the expected swap if you plan to hold overnight. If the total cost is more than twenty percent of your expected profit, the trade probably is not worth taking. High-cost trades need bigger moves to be profitable, which means lower probability of success.
Always compare costs across brokers. A difference of half a pip in spread might not sound like much, but over hundreds of trades, it adds up to hundreds or thousands of dollars.