When it comes to buying and selling currencies, many money managers are attracted to the prospect of intraday FX trading, especially as it can sometimes be lucrative. Yet there is more to this manner of forex trading than first meets the eye, including some hidden costs. In this article, we explore how to calculate them and how to manage them.
What Intraday FX Trading Costs Should I Be Aware Of?
As discussed in a previous article, there are two main costs to consider in FX trading: the trading commission and the swap cost.
How To Determine Your FX Trading Costs
Are you ready to estimate your intraday FX trading costs? To do so we need to start with some basic maths, and we’ll be focusing on an example with EUR/USD and a top-of-the-book bid/ask spread of 0.5 pips, commission included.
With one buy and one sell per day, a 0.5 pip paid in the spread is equivalent to $50 per $1 million. But if you trade round turn one lot of EUR/USD per day, which is €100,000 (base currency), that 0.5 pip suddenly becomes equivalent to $5 per lot.
Meanwhile, if you trade everyday and pay $5 pip per day for 260 days, the pip goes up to $1,300 per annum, or approximately €1,200. On one lot, the €1,200 is equivalent to 1.2% of your base amount, and if you are trading with 10 times leverage, your cost becomes 12%, which is 1% per month on your capital.
On the other hand, the swap fee is not applied if you have no overnight positions. When you have a positive swap, the interest received can balance your trading costs, but you miss this opportunity on intraday trading.
Volume is Crucial in Calculating FX Trading Costs
What is called the capital turnover per annum has a big impact on your net return, especially since more volume means more trading fees. In the previous example, €100,000 was traded 260 times, but many traders have a turnover over 2,000 times.
This means that it’s extremely important to compare your average gross return per trade with your trading costs, and then work to balance the two.
How Can I Easily Monitor My Trading Cost?
This brings us to the most pertinent question of all: how to monitor and, hopefully, reduce your FX trading costs.
- You should work with a broker that provides you with gross prices and charges trading fees separately. This way, it becomes possible to calculate your costs from gross to net, with the trading commission being one important component in addition to the swap fee and the slippage.
- You should also work with a trading platform that provides you with the information you need to easily monitor your trading. Our investment strategy software, CYBMIND, comes with integrated Spotfire® capabilities, giving you the chance to combine analytics and trading into one platform.
Are You Ready to Save Money on Your FX Trades?
With hidden fees on thousands of transactions, manually calculating FX trading costs can be difficult. Yet if you choose the right brokers and the right software, the exercise can become an easy one; and we’re here to help with the second part.
So, get in touch with us to discover how you can improve your trading cost analyses with CYBMIND and Spotfire.