The Cost of Forex Trading

The Cost of Forex TradingYou may occasionally hear Forex trading referred to as a zero-sum game, meaning that for every winning trader, there is a losing trader that has lost precisely what the winning trader won. This idea needs to be expanded to include the possibility that it might require many losing traders to compensate one large winning trader.

The idea of Forex trading being a zero-sum game, however, is in reality a fallacy because Forex trading is worse than a zero-sum game. This is because the total profit of all winning trades is reduced by the cost of trading Forex, while the cost of all losing trades is added to that loss.

Ignoring the fixed costs of trading Forex, such as hardware and software, Internet connections and education, the main cost of trading Forex comes from the fees that are charged by Forex providers.

In the case of Market Maker Brokers, this fee is based on the spread between the buying and selling prices of a currency pair. Four major currency pairs, such as the EUR/USD, this difference between buying and selling prices, known as the spread, should be relatively low. For exotic currencies, those of any country that are subject to wild and unpredictable swings in the value of their currency, the spread will be high.

One thing that is absolutely certain with the Market Maker Broker is that the spread will vary according to trading conditions. When the market is sedate, spreads will be low, but when volatility is high, spreads will increase. Some traders view this as a negative aspect of using a Market Maker Broker, but in actuality, traders can use variable spreads to their advantage.

Low spreads will generally indicate a lack of activity or strong price trend in the market. Low spreads supply a very valid signal that attempting to enter a trade under these conditions is a major waste of time. High spreads, on the other hand, can be used to indicate that it is time to exit a trade with profits intact, or minimal losses.

There are Forex providers, known as Electronic Clearing Network (ECN) providers that offer lower, fixed spreads. This type of Forex provider generally charges a commission that is based on the total number of currency units traded. The trader does not derive the benefit of having variable spreads to indicate market conditions, but will have to rely on other indicators to gauge volatility.

In an ideal world, a Forex trader would have trading accounts with at least one of these two types of Forex providers. This would afford the opportunity of making a trade by trade determination of which Forex source would supply the lowest cost for any particular trade.

If it must be an either/or decision, it becomes a matter of determining which provider supplies the best value for the trading style and the average size of the trade involved. It is also worth noting that the difference in minimum account size and trade size is frequently quite significant between these two types of Forex providers.

 

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