Spread, Commission & Swap — The Hidden Costs of Trading 💸
Beginner13 min2025
13 min read
There's no such thing as free trading. Every position has a price. While brokers advertise "zero commission" or "tight spreads," the cost is always there—hidden in the bid-ask gap, charged as commission, or deducted as swap. Understanding these three costs (Spread, Commission, Swap) is the difference between calculating real profitability and being slowly bled by hidden fees you never saw coming.
You've mastered Lot Sizes, Pips, and Position Sizing. You know HOW to trade. But here's the reality check:
Knowing how to execute means nothing if you don't know what it costs.
Imagine this scenario:
You're a scalper targeting 10-pip profits. You calculate perfectly: Entry at 1.0850, target at 1.0860, 10 pips = $100 profit per trade (1.00 lot).
You take 10 trades in one day. Win rate: 60% (6 wins, 4 losses).
Your math:
6 wins × $100 = +$600
4 losses × -$100 = -$400
Net: +$200 (profitable day!)
Your actual P/L: -$50 (LOSING day!)
What happened? You forgot about costs:
Spread: 2 pips per entry × 10 trades = 20 pips total cost = -$200
Commission: $7 per round turn × 10 trades = -$70
Total costs: -$270
Net: $600 - $400 - $270 = -$70 loss
You had a winning strategy (60% win rate) but lost money because you ignored transaction costs. Your 10-pip targets couldn't overcome the 2-pip spread + commission.
The Professional Difference: Retail traders focus only on entry and exit prices. Professional traders calculate total costs BEFORE entering and only take trades where the target is large enough to absorb costs and still provide 1:2 R:R. They choose broker models (ECN vs. Market Maker) based on their strategy. Scalpers need 0.5-pip spreads. Swing traders can handle 3-pip spreads. Ignoring costs is amateur. Optimizing for costs is professional.
1Chapter 1: The Cost of Entry - Spread and Bid/Ask
~4 min
The most immediate and universal cost in forex trading is the Spread—the difference between the price at which you can buy and the price at which you can sell.
Every currency pair quote shows two prices:
Ask Price (Offer Price):
The price the broker sells to you
The price you pay when buying
Always the higher price
Used for: Buy market orders, closing Sell positions
Bid Price:
The price the broker buys from you
The price you receive when selling
Always the lower price
Used for: Sell market orders, closing Buy positions
This is why spread is a COST—you must overcome it before profit.
Spread size is directly tied to market liquidity:
High Liquidity (Tight Spreads):
Major pairs (EUR/USD, GBP/USD, USD/JPY)
London session (3 AM - 12 PM EST)
New York session (8 AM - 5 PM EST)
Overlap (8 AM - 12 PM EST): Tightest spreads
Normal spread: 0.5-1.5 pips
Low Liquidity (Wide Spreads):
Exotic pairs (USD/TRY, EUR/ZAR)
Asian session (low volume)
Sundays (market just opened)
Late Friday (market closing)
Holidays
Spread: 5-50 pips (or more)
Extreme Conditions (Massive Spreads):
Major news releases (NFP, CPI, Fed decisions)
First 15-30 minutes after news
Flash crashes
Spread: 10-100+ pips
Avoid trading entirely
Pro Tip
Professional Insight: Spread is lowest during London/NY overlap (8 AM - 12 PM EST). This is when most professionals trade. During Asian session, EUR/USD spread might be 2-3 pips instead of 0.5 pips. That's 4-6x higher cost. If you're scalping for 10 pips, a 3-pip spread destroys your edge. Trade when liquidity is highest.
2Chapter 2: Commission - The Alternative Cost Model
~3 min
In some broker models, the cost of entry is split between a very tight spread and a separate Commission fee.
Model 1: Wide Spread, No Commission (Market Maker)
Structure:
Spread: 2-3 pips typical (markup included)
Commission: $0
Total Cost: Built into spread
Pros:
Simple (one cost to track)
No surprise fees
Good for beginners
Cons:
Higher total cost for high-volume traders
Spread is the broker's profit (conflict of interest)
Model 2: Tight Spread + Commission (ECN/STP)
Structure:
Spread: 0.2-0.8 pips (near raw interbank)
Commission: $3-$7 per Standard Lot round turn
Total Cost: Spread + commission
Pros:
Lower total cost for high-volume traders
Transparent pricing (see exact spread)
No conflict of interest (broker doesn't profit from spread)
Cons:
More complex (two costs to track)
Commission adds up on high-frequency trading
Typical Commission:
$6-$7 per Standard Lot (1.00) per round turn
Round turn = Open + Close (charged once for both)
Scaling by Lot Size:
1.00 lot: $7 commission
0.10 lot (Mini): $0.70 commission
0.01 lot (Micro): $0.07 commission
Scenario: 1.00 lot EUR/USD trade, 50-pip target
Market Maker:
Spread: 2.5 pips = $25
Commission: $0
Total Cost: $25
ECN Broker:
Spread: 0.5 pips = $5
Commission: $7
Total Cost: $12
Winner: ECN (saves $13 per trade)
Over 100 trades: ECN saves $1,300!
Professional Rule: High-volume traders (scalpers, day traders) benefit from ECN. Low-volume traders (swing traders, beginners) are fine with Market Makers for simplicity.
Compare Broker Models
Test both Market Maker and ECN accounts to understand cost differences
The Swap (also called "rollover interest" or "overnight financing fee") is an interest rate differential applied to positions held open past the market's close time (typically 5:00 PM EST).
When you trade a currency pair, you're essentially:
Borrowing the Quote Currency
Buying the Base Currency
Interest Rate Differential:
Every currency has an interest rate (set by its central bank). Swap is calculated based on the difference between:
Interest rate of currency you bought
Interest rate of currency you sold
Positive Swap (You GET Paid):
Condition: Currency you bought has higher interest rate than currency you sold
Example:
Buy AUD/JPY
AUD rate: 4.35%
JPY rate: 0.10%
Differential: +4.25% in your favor
Result: You receive swap payment daily
Negative Swap (You PAY):
Condition: Currency you bought has lower interest rate than currency you sold
Example:
Buy EUR/USD
EUR rate: 4.00%
USD rate: 5.50%
Differential: -1.50% against you
Result: You pay swap fee daily
Position: Long (Buy) AUD/JPY, 1.00 Standard Lot
Interest Rates:
AUD: 4.35% annual
JPY: 0.10% annual
Differential: +4.25%
Daily Swap (Approximate):
Daily Swap = (Position Value × Interest Differential × Days) / 365
Daily Swap = ($100,000 × 0.0425 × 1) / 365 ≈ $11.64 per day
Hold for 30 days: +$349 in swap payments
Professional Use: This is the Carry Trade strategy—profiting from interest differentials while hoping for favorable price movement.
Special Rule: Brokers charge 3 days' worth of swap on Wednesday (or Thursday, depending on broker) to account for the weekend.
Why:
Forex market closed Saturday/Sunday
Interest still accrues over weekend
Accounted for on Wednesday rollover
Impact:
Wednesday swap = 3x normal amount
If normal swap is -$5, Wednesday swap is -$15
Professional Rule: Close high-negative-swap positions before Wednesday 5 PM EST if planning to avoid weekend hold
Monitor Swap Rates
Practice tracking swap charges and understand carry trade opportunities
Paid upon entry, immediate cost (usually 1-3 pips on majors), must overcome spread to break even, varies by pair, session, broker model
2. Commission (ECN Fee)
Charged by ECN/STP brokers, typically $5-$7 per Standard Lot round turn, scales with lot size, alternative to wide spreads
3. Swap (Overnight Interest)
Charged/credited for positions held past 5 PM EST, based on interest rate differential, can be positive (you get paid) or negative (you pay), triple swap on Wednesdays
Professional Cost Management
Calculate total cost before entering any trade, choose broker model based on strategy (scalpers → ECN, beginners → Market Maker), trade during high-liquidity sessions for tight spreads
Risk-Reward Integration
Account for swap if holding overnight, ensure targets are large enough to absorb costs + provide 1:2 R:R
The Universal Truth: Ignoring costs turns winning strategies into losing accounts. A 60% win rate with poor cost management loses money. A 50% win rate with excellent cost management makes money.
Not always. A low spread is better only if it's the true total cost.
Watch out for:
"Zero spread" accounts with massive hidden commissions
"Tight spread" Market Makers that profit when you lose (conflict of interest)
Advertised spreads that only apply during perfect conditions
Professional Check: Calculate total cost = spread + commission for your typical trade. Compare across brokers. The lowest total cost wins, not the lowest advertised spread.
Q2: How can I avoid paying swap fees?
Three Methods:
Method 1: Close Before Rollover (Day Traders)
Close all positions before 5 PM EST
Zero swap charged
Simplest solution
Method 2: Swap-Free Accounts (Islamic Accounts)
Offered by some brokers (for religious reasons)
No swap charged
Often replaced with small administrative fee
Available to all traders, not just Muslim traders
Method 3: Only Hold Positive Swap Positions
Check swap rates before entry
Only hold overnight if swap is positive (you get paid)
Example: Long AUD/JPY typically pays swap
Q3: What is negative slippage and how does it relate to spread?
Slippage occurs when your order fills at a different price than requested.
Negative Slippage:
You request buy at 1.0850
Market moves fast
Spread widens from 1 pip to 10 pips
Order fills at 1.0860 (10 pips worse)
Lost $100 to slippage (1.00 lot)
When It Happens:
Major news releases (NFP, CPI, Fed)
Flash crashes
Low liquidity periods
Gap openings (Sundays, post-holidays)
Prevention: Avoid trading during news, use limit orders instead of market orders when possible.
Q4: If I buy a Mini Lot (0.10) with a 1-pip spread, how much did the trade cost me?
Calculation:
Cost = Spread (pips) × Pip Value per Lot × Lot Size
Cost = 1 pip × $1/pip × 0.10 = $1.00
Answer: $1.00 cost to enter the trade.
For USD-quoted pairs:
Mini Lot pip value: $1/pip
1-pip spread = $1 cost
2-pip spread = $2 cost
3-pip spread = $3 cost
Q5: How do I find the swap rates for my broker?
Methods:
1. Broker Website:
Look for "Swap Rates" or "Rollover Rates" page
Usually updated weekly
2. Trading Platform:
Right-click currency pair → "Specification" or "Contract Details"
Shows Long Swap and Short Swap
Displayed in pips or dollars per lot
3. Account History:
Check your closed trades
Look for "Swap" column
Shows exact amounts charged/credited
Professional Habit: Check swap rates BEFORE entering any position you plan to hold overnight. Factor swap into your profit target.
The Spread in a currency quote is the difference between which two prices?
Answer:
The Spread is the difference between the Ask Price and the Bid Price. The Ask is the price you pay when buying (higher), and the Bid is the price you receive when selling (lower). The gap between them is the spread—your transaction cost. Formula: Spread = Ask - Bid.
Which trading strategy is most likely to be negatively impacted by high Swap fees?
Answer:
Swing Trading (holding for days/weeks) is most impacted by swap fees. Scalpers and day traders close positions before 5 PM EST rollover, paying zero swap. Swing traders hold for days, accumulating swap charges daily. A -$8/day swap over 10 days = -$80 cost (potentially exceeding profit). Must factor swap into targets.
If a broker charges a commission, which broker model are they most likely using?
Answer:
They're most likely using ECN/STP (No Dealing Desk) model. ECN brokers offer very tight spreads (0.3-0.8 pips) near raw interbank rates, then charge a separate commission (typically $5-$7 per Standard Lot). Market Makers build their profit into wider spreads and charge zero commission. ECN = tight spread + commission.
A trader opens a long (Buy) position. Their entry price will be executed at the:
Answer:
Buy positions execute at the Ask Price (the higher of the two prices). This is the price the broker sells to you. When you buy, you always pay the Ask. When you sell, you always receive the Bid. The difference (spread) is your cost. This is true for all market orders.
Triple Swap typically occurs on which day of the week?
Answer:
Triple Swap occurs on Wednesday (or Thursday for some brokers) to account for the weekend. Since the forex market is closed Saturday/Sunday but interest still accrues, brokers charge 3 days' worth of swap on Wednesday. If normal swap is -$5, Wednesday swap is -$15. Close high-negative-swap positions before Wednesday 5 PM EST to avoid.
You now have complete understanding of the financial costs of trading. This knowledge is your foundation for calculating real profitability.
Action Item: Use your Demo Trading Account to observe the difference between a high-commission ECN account and a low-spread Market Maker account. Execute the same trade on both account types and compare total costs. Check the Swap fees for different currency pairs on your broker's website, and observe the swap charged on a Wednesday rollover. Practice calculating total cost (Spread + Commission + Swap) for each trade before execution—this becomes second nature for professionals.
Proceed to Lesson 12: Bid/Ask Price and Quotes Explained
Calculate Your Costs Like a Pro
Practice cost analysis on a demo account. Compare spread types, calculate commission impact, and monitor swap charges. Learn to choose optimal broker models for your strategy and trade during tight-spread sessions. Your profitability depends on cost control.
Tip: Start on Demo, switch to Live after 3 consistent weeks.
🚀 Ready to calculate your costs like a pro? Use our exclusive link to open your practice account and compare different cost structures offered by various account types!
