Spread, commission and slippage: the costs you pay on every trade

Every time you open a position, you start slightly in the red. That is not a bug in your platform: it is the cost of accessing the market. This cost comes in three main forms: the spread, the commission and slippage. One by one, they look tiny. Added up over hundreds of trades, they can make the difference between a profitable strategy and a losing one.

The spread: the gap between two prices

At any moment, your broker quotes two prices. The bid is the price at which you can sell. The ask is the price at which you can buy. The ask is always higher than the bid, and the gap between them is called the spread.

In practice, if you buy at 1.08512, your position is valued at the bid, 1.08500. The market has to rise 1.2 pips just to get you back to zero. The smaller your target, the heavier this break-even point weighs.

Fixed spread or variable spread

Some brokers offer a fixed spread: for example 1.5 pips on EUR/USD, whatever the conditions. It is predictable, but that spread is usually wider than the average variable spread, and the broker can still reject or requote your order when markets get busy.

Most brokers now use a variable (or floating) spread that follows market liquidity. On a major pair, during the London session or the London–New York overlap, it can get very tight. At other times, it widens markedly. The "from" spread advertised on broker websites reflects the best conditions, not the average.

Commission on ECN and raw spread accounts

There are two main pricing models. On a standard account, the broker earns only through the spread, with no commission. On an ECN or raw spread account, the spread is close to the interbank spread, but you pay a fixed commission per lot, usually charged on opening and on closing.

To compare two offers, convert everything into pips. A 7-dollar round-turn commission on one lot equals 0.7 pip on EUR/USD. Add it to the raw spread and you have the real cost. Watch out too for commissions quoted "per side" or "round turn": the same offer can look half the price depending on how it is presented.

Think about how much you trade, too. A trader who opens two positions a month will see little difference between the two models. Someone who opens several a day can save hundreds of dollars a year by picking the pricing that suits their style.

Slippage: when price slips

Slippage is the gap between the price you ask for and the price your order is actually filled at. It affects market orders and stop orders, including your stop loss. It happens when price moves between the moment you click and the moment the order reaches the market, or when there is not enough liquidity at your price.

• Negative slippage: you click to buy at 1.0851 and get filled at 1.0854. On one lot, those 3 pips cost you $30.
• Positive slippage: you click at 1.0851 and get filled at 1.0849. You gain 2 pips, or $20 on one lot.
• Slipped stop loss: your stop is at 1.0800, but a news release makes price jump from 1.0805 to 1.0790. You exit at 1.0790, 10 pips further than planned.

A reputable broker applies slippage both ways. If you never see positive slippage over months of trading while you often suffer negative slippage, start asking questions about execution quality.

When costs blow out

Spread and slippage are not constant. They jump sharply at a few well-known times that every trader should spot in advance.

• Major economic releases: US jobs data, rate decisions, inflation. Just before and just after, liquidity vanishes and the spread can widen by several pips.
• The Sunday evening market open: prices restart after the weekend, often with a gap and very wide spreads.
• The daily rollover at 5pm New York time (10pm in London): many liquidity providers step back for a few minutes.
• Stock market opens: on the DAX at 8am London time or the S&P 500 at 9:30am New York time, the first few minutes are often choppy.

To measure how these costs affect your position size, first work out the pip value of the instrument you trade. You can then convert any spread or commission into euros or dollars.

Costs are not a reason to stop trading, but they must go into your calculations. Leveraged trading loses money for the majority of retail traders, and poorly controlled costs play a part in that. In the next lesson, you will discover the last cost, the one that lands every night: swap.