The three costs: spread, commission, swap
What you learn in 3 minutesThis lesson shows the three costs you pay on a trade: the spread, the commission and the swap. You will work out the total cost of a round trip on one standard lot of EUR/USD, so you can see the money before you open the position.
A round trip on 1 standard lot of EUR/USD
| Step | Amount | Note |
|---|---|---|
| Spread cost | KSh 1,560 | 1.2 pips on one standard lot. One pip is 10 units of the quote currency, so 1.2 pips is 12 units of the quote currency. At 1.0850, that is 12 divided by 1.0850, about 11.06 units of the base currency. Converted to KES at the current rate, this comes to about KSh 1,560. The rate varies between brokers and over time. |
| Commission | KSh 910 | A commission of $7 for the round trip. Converted to KES at the current rate, this comes to about KSh 910. Some account types charge no commission but widen the spread instead. |
| Swap for one night | KSh 0 | If you close the trade on the same day, you pay no swap. If you hold it overnight, the broker charges or credits a swap. The amount depends on the broker and the interest rate difference between the two currencies. |
| Total cost if closed the same day | KSh 2,470 | Spread cost plus commission. This is the amount the price must move in your favour before the trade breaks even. |
The broker may round the spread, charge a different commission on other account types, and apply a swap for each night the position stays open. The swap can be positive or negative. All three costs are known before you trade.
The mistake people make here
The common mistake is to look only at the spread and forget the commission and the swap. A tight spread with a commission can cost more than a wider spread with no commission. Before you trade, add all three costs together and compare that total with the size of the move you expect. If the total cost is large compared with the move, the trade starts from behind.Check yourself
On one standard lot of EUR/USD, the spread is 1.2 pips and the commission is $7 for the round trip. If the exchange rate is 155 KSh per dollar, what is the total cost in KSh if you close the trade the same day?
Spread cost: 1.2 pips is 12 units of the quote currency. At 1.0850, that is 12 divided by 1.0850, about 11.06 units of the base currency. At 155 KSh per dollar, that is about KSh 1,714. Commission: $7 times 155, which is KSh 1,085. Total cost: KSh 1,714 plus KSh 1,085, which is KSh 2,799.
If you hold the same trade for three nights and the swap is KSh 300 per night, what is the total cost now?
Swap for three nights: 3 times KSh 300, which is KSh 900. Add the spread and commission from the first question: KSh 2,799 plus KSh 900, which is KSh 3,699.