Beyond Spreads: Hidden costs in Forex Trading

The majority of traders tend to solely focus on spreads when choosing a broker. Yet, there are other costs and fees that may be less explicit, and therefore some traders might not take them into consideration. We sat down with Johnny, Head of Liquidity at Tickmill, to shed light on these hidden costs that traders should be aware of to make more informed decisions.Understanding Additional Costs in Forex TradingJohnny, what additional costs should traders have in mind?Spread is arguably the number one cost traders look at before trading. However, a lot of inexperienced traders tend to ignore other important costs and fees that can highly affect their trading.I will give a brief breakdown of these costs and explain where Tickmill stands on each one of them:1) Spread Spread is the difference between the Bid and Ask price of a certain product. The tighter the spread, the lower the cost.At Tickmill, we work very hard to obtain and maintain the lowest spreads in the market.Our spreads on FX Majors, Gold and major indices place us among the top 3 providers worldwide based on our market analysis and the analysis of independent third-party providers that we continuously monitor.For example, our EURUSD average spread is 0.1 pips throughout the 24-hour trading day and is predominantly at 0 pips during the European and American sessions. On Gold, our spreads average 9 cents. Additionally, given the large increase in demand due to the expansion of our business worldwide, we’ve been adding more liquidity to exotic pairs. This has allowed us to provide super competitive spreads on currencies such as the Turkish Lira, the Mexican Peso, and the Scandinavian currencies.2) Trading Commission The trading commission is a charge deducted from your account at the time you open a trade. The commission is usually charged on a ‘per million’ or a ‘per traded lot’ basis. It is worth noting that brokers who promote very low or even zero spreads typically charge commissions. Less experienced clients tend to overlook commission costs since they are not immediately deducted from their account balance. This dynamic allows some brokers to promote seemingly low spreads while charging high commissions.Here at Tickmill, we pride ourselves on our transparent fee structure. For the VIP accounts, our commission is 1 per side (10 per million), and for standard Pro accounts, it’s 2 per side (20 per million).Hence, our commissions are among the lowest in the industry. When you consider both our spreads and commissions together, it makes us arguably the lowest-cost provider in the retail FX space.Let’s consider a practical example: Imagine you have a Tickmill VIP account.Our spread on USDJPY is 0.2, and the commission is 1 per side for every 100K traded. Your total cost for opening and closing a 1-lot trade is equal to:$2 in commission + $1.68 in spread = $3.68Now, let’s compare this example to another broker offering a zero spread on USDJPY but a hefty commission of $3.5 per lot per side.In this case, your total cost for opening and closing a 1-lot trade would be:$7 in Commission + $0 in spread = $7Surprisingly, despite choosing the 0-spread broker, your total cost ends up being 1.9 times higher.By choosing to trade with Tickmill, you would be saving more than $3 per round lot.3) Currency Conversion Trading in markets that settle in a different currency from your account's base currency may incur a currency conversion charge. For example, if your account base currency is US dollars and you trade USD/CAD, your profits will be automatically converted from CAD back to USD before posting to your account. Most brokers charge a percentage on this conversion, and the fee usually ranges from 0.5% to 1%. This is a fee that a lot of people overlook, but it can add up! This is especially true if you are trading products that settle in a currency that is different from your account’s base currency.At Tickmill, we don’t charge any conversion fees; your PL is converted based on the live spot rate.4) Overnight Rollover & Financing (Swaps) A rollover, also known as a swap, is the simultaneous closing of an open position for today's value date and the opening of the same position for the next day's value at a price reflecting the interest rate differential between the two currencies. Rollover costs are something you should be paying close attention to if you hold trades for extended periods of time.Financing cost is another important cost that is usually bundled into the rollover fee. The ‘swap charge’ you see on your account for CFD products is usually financing costs. When you trade CFDs with leverage, your broker is basically lending you money to be able to open a position that you wouldn’t be able to open with your own equity. The broker charges a small fee to cover the cost of the money you've effectively borrowed.At Tickmill, we periodically review our rollover rates and adjust them to fit with current market and industry conditions. Just as with spreads, we leverage our relationships with our LPs to get the best rates possible. Any positive adjustment to the rate we pass on to our clients.5) Inactivity Fee Many brokers charge your account an inactivity fee if you don’t trade for a certain period. There is no specific standard that brokers rely on in setting this charge. However, at Tickmill, we do not enforce account inactivity fees.6) Withdrawal Fee Withdrawal costs are also an important cost to consider when trading on the Forex market. To withdraw your profits from your brokerage account to your personal bank account, most brokers will charge a withdrawal fee. This is either done to cover payment processing fees or to discourage clients from withdrawing their funds.Guess what… Tickmill does not charge withdrawal fees either.7) Slippage & Rejections Lastly, there are some indirect costs clients incur and need to be aware of, such as Slippage and Rejections.Understanding SlippageCan you elaborate on the concept of slippage?In simple terms, slippage is the difference between the price you saw on the screen before opening a trade and the price at which your trade was executed. When you click the BUY or SELL button on your platform, you’re placing a market order with your broker. The broker will try to get you the best possible price in the market, but that doesn’t always mean you will get the price you traded for.Why does slippage occur?The most common reason slippage occurs is because of an imbalance between buyers and sellers.When does this imbalance usually occur?Slippage most often occurs during periods of either low liquidity, such as on market open, rollover period, holiday sessions, or very high volatility such as major financial announcements, unexpected news, important economic events, or simply during a sharp market move.It is important to mention that the size of the trade plays a key role in determining whether the clients will be filled at the price they see on the platform or will be slipped.Most platforms in the retail FX space allow traders to see the Top of Book (ToB) price. The ToB liquidity may not always be large enough to cover a large order; that order would sweep the liquidity book and be filled on a VWAP (Volume Weighted Average Price) basis depending on the available liquidity. That’s why it’s important to trade with brokers that have solid liquidity relationships with major liquidity providers.In summary, slippage is another indirect cost that a trader should keep in mind.The same applies to trade rejections; having your trade rejected is, by default, an opportunity cost due to the lost opportunity. Even though it is harder to quantify relative to slippage, it is definitely something you should be monitoring very well. After all, what’s the point of having extremely competitive spreads if the broker can’t honor them?And, just in case you were wondering, Tickmill has maintained an excellent execution quality record. Let’s take for example, EURUSD, the most traded FX pair based on Tickmill Europe’s latest statistics:Fill Ratio: 99.99%Rejection Ratio: 0.01%Slippage Statistics:At Quote / No Slippage: 50%Positive Slippage: 23% (average + 0.20 pips)Negative Slippage: 27% (average – 0.24 pips)