Forex trading and financial market trading is business like any other. The golden rule of business as well as online trading is simple: if the costs are higher than the earnings, you’ll lose money. However, if the earnings are higher than the costs, you’ll make money.
It’s interesting to compare the approach of people who are starting their own business to those who are getting into forex trading.
When you are starting your own business, you will most likely first want to know in detail what costs there will be to starting the business, and then you’ll want to learn about the potential earnings.
With forex traders, it is the other way around. Each trader tries to find his holy grail; a business strategy that will bring him as many profitable trades as possible. What traders often forget is that forex trading includes the costs for each executed trade on a real account, which strongly influences the earnings you get.
Here are the costs of forex trading:
1) Spread – The difference between the buying and the selling price. When speculating on the increase of the market, you open the trade at the ASK price (blue button in the MetaTrader 4 platform – buy by market). You then close the trade (manually or using Stop-Loss or Profit/Target) for the BID price (lower price).
Spread can be variable or fixed; a variable market spread usually signifies a healthier trading environment. Fixed spread can only be provided with a trading model, where your trading positions aren’t sent to the real interbank market, meaning the counterparty must always be the market maker in the case of a fixed spread.
2) Commission – Commission is a one-time fee for opening and closing a trade.
Brokers who offer interbank spreads without a markup on the broker’s part, usually earn their fees based on commission.
3) Swap – This fee only influences traders who hold a position over night, when the rollover of the positions to the next trading day occurs. Swap can be negative as well as positive.
Spread, commission and swap are known in advance according to the terms and conditions of your broker.
But let’s have a look at one more cost most brokers don’t tell you about.
4) Slippage . It is the difference between:
- The price at which you’d like to execute your trade (the moment you click the open/close trade button in the platform, or the moment the Stop-Loss, Profit-Target or other pending order is to be executed).
- The price at which your broker executes the trade. This price can differ substantially depending on the fairness and qualities of your broker. The qualities of a broker lay in his technologies, trading servers, liquidity providers (whether they’re the world’s biggest banks), in whether your broker sends an order to the interbank market to the real liquidity providers when executing a trade, and many others.
You can only expect slippage (the inaccuracy in executing trade orders) in a real trading account. In a demo account, you’ll see an accurate execution of orders most of the time.
Slippage also influences each of your trade orders – entries and exits (regardless of whether executed at the market price or by a pending order).
It is also important to add that the slippage with a good broker should be negative as well as positive, meaning in your favor according to the actual prices obtained from the Liquidity Provider during the execution of the orders. If brokers don’t like to talk about slippage you better think twice why that may be.
Let’s clarify. A broker can advertise that you can trade EUR/USD for one pip. That means one standard lot EUR/USD for 10 USD. But that is only a half of what every trader who is serious about trading needs to hear.
Imagine that at each entry and exit, the broker can help himself get higher revenue by an average slippage of 0.5 pips. At each, entry, you’ll (on average) get a worse trade execution by 0.5 pips and at each exit, it will be another 0.5 pips. That is another 10 USD per 1 standard lot EUR/USD! It seems like an insignificant difference at first glance and most traders won’t ever notice and complain about it, but in the end, it is a key deciding factor between success and failure.
Are you starting to see how and in whose favor slippage works?
Slippage should sometimes be negative and sometimes positive, but its value is expected to be altogether neutral in the long run. With some brokers, however, the slippage value becomes increasingly more negative.
Let’s end with a statistics after a year of trading.
If we assume that a trader trades with the same strategy, he executes 2 trades on average with 1 standard lot volume. Let’s assume there are 260 business days in a year and that we have two brokers. Both have the spread of 1 pip for EUR/USD. The first broker (the fair one) has a neutral slippage, the second one, however, has a negative slippage of 0.5 pips per transaction.
This is what the results look like after a year of trading:
That means that when trading using an identical strategy with an unreliable broker, you’ll pay 5200 USD more! You should also consider that the average slippage for unreliable brokers can rise much higher, and that some traders execute more than 2 lots per day. The difference then gets even bigger.
At Purple Trading, you’ll get a real fair order execution, with negative as well as positive slippage, which fully corresponds with the current liquidity on the interbank market. At Purple Trading, the trading environment is always fully adapted for profitable trading.
We at Purple Trading also try to set new standards when it comes to the transparency of order execution of all our clients. Because the MetaTrader4 trading platform doesn’t provide slippage measuring and data statistics, we’ve decided to count these data ourselves and share them with you. Below you can see the slippage distribution when executing trades of all Purple Trading clients; small private self-traders as well as corporate clients.
About the Author
Team Purple Trading
Purple Trading is a true and 100% fair ECN / STP forex broker providing direct access to the real market. High speed orders execution, no trade-offs, no limits for any type of trading, the most advanced trading technologies. Explore more about Purple Trading at www.purple-trading.com .
For more information on the risks of trading, click here .
P.M. Purple Trading is a trade name owned and operated by L.F. Investment Limited., 11, Louki Akrita, CY-4044 Limassol, Cyprus, a licensed Cyprus Investment Firm regulated by the CySEC lic. no. 271/15.