When you trade on any kind of financial instrument there are always costs involved. The good news for us is that Forex trading costs are small – if you know what you’re doing. If you follow these guidelines and understand the fee structure in Forex, you will be able to keep costs to a minimum.
Every time you buy and sell a currency pair you pay the spread. In Forex, the spread cost is simply the difference between the buying price and selling price
In the GBP/USD example above you can see two rates separated by 1 pip. The last number in both is a pipette, which was described in the what is a pip? article. If you enter a long trade you buy the currency at the higher price (Ask) which in this case is 1.65927. When you want to close your position it will close at the lower price (Bid). The spread is not always 1 pip – it changes depending on volatility and trade volume.
The spread is fairly low in our above example because this is a major currency pairs and is traded frequently. If you want to keep the spread cost to a minimum you should stick to the major currency pairs. Cross pairs tend to have a higher spread.
Also, you are charged the spread every time you close a position. This is profit that your broker makes every time you take a trade. It is irrelevant if your trade wins or loses. The broker will always pocket the spread. It’s simply the cost of trading the Forex market.
Obviously, brokers love traders that over trade and take lots of trades. Why? Every time you enter and exit a trade, they make money.
Also, the amount of lots affects your trading fees with the spread. Let’s say you are trading a mini lot and enter a trade on USD/JPY. Each pip will earn you roughly $1 and we will say the spread is 6 pips. So, you’ll be charged $6 for this trade. However, if you trade 5 mini lots, you’ll be charged $30 for the trade (5 x $6).
If you are in a trade and hold it after a certain time of day, you’ll either be charged or receive interest. This is known as rollover. Whether you are credited interest or charged interest depends on which currency pair you are trading. You can check with your broker to find out exactly what time of day they rollover positions.
As I have explained previously, when you trade a currency pair you are buying one currency and selling the other.Everyday, you brokers has to close out your trade day and open a new trade for you in order to keep it open. This happens automatically at the end of each trading day.
If you take a long position and bought the currency in the pair that has a higher interest rate in comparison to the one you sold, your broker will pay you interest. You may be asking why?
Well, this is because you effectively own the currency you bought and are borrowing the currency you are selling. Alternatively, if you sell the high interest currency and buy the low interest currency, you have to pay your broker interest.
On Wednesdays brokers charge triple rollover, so watch out for that! It is important that you ask your broker about how their rollover works. Also, be aware that on some platforms rollover is called “swap”.
How to Calculate Rollover
Calculating rollover sounds complicated but it is actually fairly straightforward. You need the following 3 pieces of information:
1. The exchange rate of the pair you are trading
2. The interest rates of both currencies you have traded
3. How much you have actually traded (eg lot size)
Now you can see how rollover works whilst in a trade. Imagine you take a long AUD/USD trade. That means you have bought AUD and sold USD. The currency exchange rate is 1.0386. The interest rate of the Reserve Bank of Australia is 4% and the US Federal rate is 0.25%. In this case, you have traded on standard lot – $100,000.
You then use the following calculation:
((lot size x (interest rate of currency bought – interest rate of currency sold ))/ (number of days in the year x current exchange rate) = rollover
So for your trade you’d do the following:
(($100,000 x (0.0375)) /379.089 = rollover
3,750 / 379.089 = $9.89
In this trade you would make $9.89 in rollover interest swap. However, if you instead sold AUD/USD, it would be a different story. You would be charge $9.89.
That may seem like a lot, but it is very small when you consider you are trading $100,000 or one standard lot. Since one pip on a standard lot is worth $10, you have pretty much gained or lost only one pip, depending on whether you bought or sold the pair.
Hopefully this example shows you the important of rollover.
It can be useful if you commonly hold trade overnight to write down the interest rates of currencies you trade most.
How to Avoid Rollover
If you still find rollover confusing or you don’t want to be charged rollover, there is a simple answer.
In order to avoid rollover, simply do not hold a trade during the time your broker initiates rollover. Also, since most brokers charge triple rollover on Wednesday, they don’t charge rollover on the Thursday or Friday. You can sometimes take advantage of this by opening a trade on Thursday and, if you need to, hold it overnight until Friday.
You should always check how your broker applies rollover though so you aren’t caught out!
If you trade my free Price Action Strategy, 70% of the trades I take are on Thursday and Friday. This means you will rarely get charged rollover!