The Hidden Costs of Forex Trading

Broker comparison websites are often the first step for retail clients looking for a broker, however one must also consider

Everyone knows that the costs of forex trading have a dramatic impact on profitability and are one of the main factors when choosing a broker to trade with. However, when comparing offers from several brokerages, it is common to consider trading commissions, spreads, account maintenance and deposit/withdrawal fees. All this information is usually publicly available. In this article I will discuss the less transparent costs directly related to trading which should also be considered.

Top-of-the-book spreads

Broker comparison websites are often the first step for retail clients looking for a broker. Most of these website offer real-time spread comparison including/excluding the commissions and many potential clients base their opinion partly on the figures presented on these websites. While most of the pricing information provided is accurate, it does not reflect real pricing and the real liquidity available and so cannot point on how the trade will be executed.

The spreads that are shown are top-of-the-book spreads and the main question is – how deep is the broker’s top of the book liquidity? It might turn out that only 5 lots are available at the best price, the next one being several pips away. Depending on the size of the broker and the number of active clients, the chances on being the client who will be filled at the top-of-the-book price are slim.

Using weighted-average pricing, which is rarely available with brokers, is a much better indication of how the trade is likely to be filled.

Positive slippage

Slippage is the integral part of trading in ECN/STP environment and usually has a negative connotation. However, positive slippage should not be overlooked too as it is also part of ECN trading and might have an important effect on trading profits when trading limit orders.

As we know, limit orders can be executed at a set price (no slippage), at a better price (positive slippage) or not executed at all. Once a client limit order is triggered, it is typically routed to LPs at a marked-up price. This allows brokers to eliminate negative slippage while ensuring the possibility of positive slippage.

The possibility and subsequent absence/presence of positive slippage should be considered by traders who trade limit orders and in my opinion is one of the major factors outlining broker’s business ethics and integrity.

Commission and P&L conversion

It is very important to know the exchange rate at which commission and P&L are converted into your account currency. Normally they should be converted at the rate valid in the market (in the trading terminal) at the time the commissions are charged.

It is also crucial to know if the settlement is immediate or if there is a recalculation of the P&L and commissions in another currency at the rollover, which might occur at the rate valid at the time of the rollover and be different from the rate valid at the time the P&L or commissions was incurred.

While the information on the costs mentioned above might not always be available on the broker’s website, it is important to pay attention to these factors when testing the account.

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