Secrets of Suppressing Forex Trading Transaction Costs
When you will choose a futures broker (more popular as a forex broker), what is the first time you see? What is the spread ? Is the commission charged for each transaction (the cheaper the better)? What is the service? Or the ability of analysts to provide forex trading analysis?
One (or maybe all) of the things mentioned above might be your consideration. Ideally, you really need to get all of that from your chosen broker. However, related to the costs that must be incurred to make a transaction, are you sure that your chosen broker has provided the cheapest cost?
Not Just Spread
Most traders think that low spreads are one of the characteristics of a good broker. Not entirely wrong.
Indeed, small spreads are usually more desirable because of the price difference that you have to “pursue” to get a minimum break event point (BEP) condition for your transaction to be smaller.
For example, if you make a transaction to buy EUR / USD at the price of 1.14100 (Bid) /1.14115 (Ask), then the transaction will be executed at the price of 1.14115 (Ask price). At that time you will experience floating loss for the current spread , which is minus 15 pips ( quote five decimal places). That is, you just have to wait for the price to go up as far as 15 pips to get a break-even condition (BEP).
The story will be different if the spread is wide – for example – 25 pips.When you buy at the price of 1.14100 (Bid) /1.14125 (Ask), then you have to wait for the price to rise by at least 25 pips to get BEP.
Do you think like that? Let’s think again.
See Also Commission
The problem is that spread is not the only thing we have to look at.
It should be noted that all futures brokers operating legally in Indonesia (in this case obtaining permission from the Commodity Futures Trading Regulatory Agency) can certainly charge fees for every transaction made.The fee is called “commission”.
This commission is like the “wage” you have to give brokers for their services to deliver your transactions to the futures exchange, whether it’s the Jakarta Futures Exchange (BBJ) or the Indonesia Commodity and Derivatives Exchange (ICDX). Both exchanges are futures exchanges that officially operate in Indonesia. All your futures transactions (including when you do forex trading ) will be forwarded to one or both of these exchanges.
This is where you have to be more careful. Why?
Because the commission is also one of the parameters of the transaction costs that you do. Thus, how to calculate transaction costs is:
Transaction Fee = Spread + Commission
Which is cheaper?
Look at the following example:
A broker sets a spread of 15 pips. Remember this is a spread to quote 5 decimals . If you quote four decimal places , this is usually written 1.5 (one point five) pips. The commission charged is $ 30 per / lot.
Let’s say you buy 1 lot at a price of 1.14100 (Bid) /1.14115 (Ask), then that means your transaction fee at that time is 15 pips plus $ 30. That is, your transaction fee is $ 45.
Thus, to pursue Break even point only, it is not the movement of 15 pips that you need, but 45 pips .
Now let’s look at the calculation of transaction costs for forex trading
Broker does not set fixed spreads , but follows the movement of spreads in the market. But the average spread that often appears is in the range of 25 pips. Meanwhile, the commission charged for each transaction is only $ 5 (five USD) per lot.
Assume you buy 1 lot at a price of 1.14100 (Bid) /1.141125 (Ask), then that means your transaction fee at that time is 25 pips plus $ 5. That is, your transaction fee is only $ 30.
So based on the example above, which broker charged the MOST LIGHT transaction fee ? 🙂
This is a rhetorical question. You certainly can answer it correctly.
So, don’t be too easily fascinated by the low spread offered. Also pay attention to how much total transaction costs you need. The cheaper, the better, because it will be faster and easier to pursue profits.