Although many FX brokers promote FX trading as being free-of-cost, the reality is that trade commissions and swap costs are usually included in the price spread, making Forex trading costs a hidden expense few traders calculate. Our investment strategy software, CYBMIND, possesses the ability to identify, monitor, and lay out these costs for each trading position you take up, giving you a clearer idea of your gross and net returns.
Why Should You Monitor Your FX Trading Costs?
When it comes to FX trading costs, you can take it as a rule of thumb that the larger the spread, the larger the hidden commission charged will be. Even so, there are two main costs that you should be aware of and monitor.
#1. Trading Commissions
The cost for trading commission is typically applied to the spread, yet it’s more efficient to trade liquidity with the gross prices of fees and be charged for the trading volume.
This is because one pip on EUR/USD is the fourth digit in the price, and every pip difference is equivalent to $100 for every $1 million traded. As you can imagine, if you’re trading multiple millions per day, a fraction of the cost saved on every trade can have a large impact on your performance.
In addition, many trading platforms only show the top of the book bid-and-ask liquidity, but when your trade volumes are large, multiple levels of the book will be matched, and your spread/cost will increase.
#2. Swap Costs
The second component that can have a large impact on your performance is the swap cost.
When you buy currency, you receive interest on it, and when you sell it, you fork out interest. This applied interest is the currency interest rate of the Central Bank plus a spread cost, which decreases your positive interest rate and increases your negative interest rate.
So, if you have a currency pair with similar interest rates, both the long swap and the short swap will probably be negative. Plus, since the swap cost is applied over time, even if the pair rate doesn’t change, it can still impact your return.
On the other hand, when you have a currency pair with a large interest rate differential, such as the current USD rate of 5.5% and the JPY rate of 0.1%, the spread applied on the 5.4% differential provides a net carry return.
How Can SMEs Optimise Monitoring of Their FX Trading Costs?
It’s therefore imperative to monitor your Forex trading costs and spread—be they trading commissions or swap costs—so as to be able to properly analyse your transaction costs.
To do this, you’ll need to monitor your costs and avoid trading with hidden fees. When it’s clear how much your trading commission and the swap rate fees are, you then need to negotiate better terms with your broker.
Having said that, if you are a money manager with a small trading volume, you probably won’t have much power to negotiate better fees, so finding a better broker or trading only the instruments that are convenient to your trading goals may make most sense.
But even this requires thought as, usually, when a currency pair is not volatile and has a negative swap on both sides, the result will be limited opportunities for those trades to be profitable. So, instead, you may wish to allocate your risk to other instruments, which could actually reap a profit.
CYBMIND for Forex Trading Costs
This is where our investment strategy software, CYBMIND, with its Spotfire® capabilities, comes in, as it can help you identify, monitor, and analyse all your FX trading costs, giving you a clear view of where you stand.
So, if you want to better understand your trading costs and improve your trading, get in touch with us.