Hidden Costs in Forex Trading

The forex market offers many interesting opportunities every day, which, if traded skillfully, can bring traders a potentially interesting side income. Of course, traders usually know that trading is not only about potential profits but there are also costs to consider. So when choosing a broker, traders pay close attention to how tight the spreads are and what commissions the broker charges. Unfortunately, they don't realize that spreads and commissions are only the very surface level of fees. In fact, there is another layer of costs underneath that most brokers no longer disclose.

So today, we'll cover what other costs are reflected in every trade you send to the market and how to know to what extent your broker is charging them as well.

The true cost of each trading position: what the chart won't show you

The time between when you click to open or close a trade and when that action is reflected in your trading platform is so minute to the human eye that it is measured in milliseconds. However, even in such a seemingly short period of time, several things can happen that can lead to you executing your trade at a visibly higher cost than you expected.
 

So what do you pay for in trading?

1. Spreads and commissions

   Spread is the difference between the bid and ask price and is thus an absolutely fundamental cost in trading. Depending on the account you choose, you may also be charged a commission for trading a certain volume (lot). Spreads, fees, and commissions are the main parameters by which traders choose their brokerage. The lower the spread and commission, the more attractive the broker in the eyes of traders.

   That’s why you will usually find 2 basic types of trading accounts at a broker. One with higher spreads but zero commissions, the other with very low spreads where you pay a commission for the volume traded. But there are exceptions - for example, if you trade oil with Purple Trading, you never pay commissions.

2. Slippage

   Have you ever had a trade position executed at a different price than you expected? Then you have probably encountered a slippage. Depending on whether the final price played to your advantage or disadvantage, we then talk about positive and negative slippage.

   It is the slippage that is the hidden cost that most brokers do not explicitly state. In fact, it may not always occur. Your order may slide in price if it is slightly late in reaching the interbank market, where the broker ideally sends it, and thus does not manage to pair with the order at the price you expect, or in case of high market volatility.

   The market has a certain depth and orders are sorted in layers. If orders with your expected price are no longer found in the market, the broker will automatically pair you with the next closest counterparty order.

   Sometimes it may happen that the broker will pair you with an order at a better price than your expected price. That's when your broker's ethical integrity is tested. Quality brokers will admit their "mistake" that deprives them of money and pay you back for the positive slippage, while less quality brokers do nothing.

How to find out how your broker handles slippage?

If you are trading with a fair broker, it shouldn't be too hard to get data on slippage or whether the broker also recognizes positive slippage. On the Purple Trading website you can find all the information in the execution section, or you can go deeper and check detailed statistics.
 

The broker model also plays an important role

The broker model also plays a big role in the question of fees. Brokers with a so-called STP model, which include Purple Trading, send their clients' orders to the actual interbank market. In contrast, MM (Market Maker) brokers do not have to send orders to the market and usually make the counterparty to their clients. This often affects the size of the spread, but also other important aspects of trading.
 

Additional costs associated with lower quality brokers

In addition to slippage, commissions and spreads, which are among the natural manifestations of trading in the financial markets, you may also encounter the following phenomena. These are not natural and are either caused by the manipulation from the broker’s side or by broker’s poor trading infrastructure.
 

At Purple Trading we are committed to the fairest possible trading conditions, so you will not encounter any artificially manipulated costs. Indeed, as a broker with the STP model, we do not even have the possibility to manipulate our clients' orders - we send them directly to the interbank market.

Conclusion

Costs are an integral part of trading and every trader should have a clear idea of what they are paying for when trading. At Purple Trading, we strive to educate traders first and foremost and the opportunity to let them peek behind the scenes of brokerage firms is, in our opinion, just as important to traders as articles on trading strategies or live trading webinars.

In fact, being aware of hidden fees and costs by choosing a transparent broker such as Purple Trading can greatly impact your success in the financial markets.