Why Traders Must Understand Commission and Spread and How to Calculate the True Cost of Trading

Many traders focus on finding the perfect entry and exit, but overlook the trading costs that quietly eat into profits every time they open an order. Commission and spread may seem like small numbers, but when accumulated over hundreds or thousands of trades, they become a critical factor that can turn a profitable trading system into a losing one. This article will help you understand what these costs are, how to calculate them, and how they affect your trading results.

What Are Commission and Spread and How Do They Differ

Spread is the difference between the buying price (Ask) and the selling price (Bid) that the broker offers. For example, if EUR/USD has a Bid price of 1.1000 and an Ask price of 1.1002, the spread is 2 pips. You pay this spread immediately when you open an order, without waiting to close it. Spread typically varies according to market liquidity, with major pairs like EUR/USD or USD/JPY having low spreads, whilst minor or exotic pairs have much higher spreads.

Commission is a fixed fee that the broker charges per lot traded. It is usually charged both when opening and closing an order, such as $3.5 per lot per side (totalling $7 per lot for open and close). Some brokers use a commission-based model by offering very low spreads (almost equal to the actual market price) and charging commission instead, whilst others have no commission but wider spreads.

The main difference is: spread is a variable cost that changes with market conditions, whilst commission is a fixed cost that can be predicted with certainty. Both eat into your profits in the same way, and traders must include them as part of their total trading costs.

How to Calculate the True Cost Per Trade

Calculating the true cost of each trade requires combining both spread and commission. Suppose you trade EUR/USD with a size of 1 standard lot (100,000 units), the broker has a spread of 0.8 pips and charges $7 commission per lot (including open and close).

• Cost from spread: 0.8 pips × $10 (pip value of 1 standard lot EUR/USD) = $8
• Cost from commission: $7
• Total cost per trade: $8 + $7 = $15

This means that every time you open and close a 1 lot order, you must make at least 1.5 pips profit to break even first, and only profits beyond that are your actual profits. If you trade 5 rounds per day, the daily cost is $75, or $1,500 per month (20 trading days). This figure is not insignificant.

For brokers with no commission but wide spreads, such as 2.5 pips, the cost would be 2.5 × $10 = $25 per lot, which is clearly higher than the commission-based model. This is why traders who trade frequently (scalpers or day traders) typically choose brokers with low commission and narrow spreads.

The Impact of Costs on Long-Term Trading Results

Imagine you have a trading system that makes an average profit of 10 pips per trade, trading 100 rounds per month with a size of 1 lot. If your system has positive expectancy but you haven't factored in costs, the results could be vastly different.

Case 1: Low spread broker + commission (cost 1.5 pips per trade)

• Profit per trade after costs: 10 - 1.5 = 8.5 pips
• Profit per month: 8.5 × 100 = 850 pips or $8,500

Case 2: Wide spread broker with no commission (cost 2.5 pips per trade)

• Profit per trade after costs: 10 - 2.5 = 7.5 pips
• Profit per month: 7.5 × 100 = 750 pips or $7,500

A difference of 1 pip per trade becomes $1,000 per month, or $12,000 per year. If you're a scalper trading 20-30 rounds per day, excessive costs could turn a profitable system into a losing one. This is why keeping a trading journal and calculating the true cost per trade is so important.

How to Choose a Broker That Suits Your Trading Style

Choosing a broker isn't just about who has the lowest spread, but must be considered alongside your trading style.

For Scalpers and Day Traders

Traders who trade frequently need the lowest cost per trade. They should choose brokers using ECN/STP models with very narrow spreads (0.0-1.0 pips) and low commission (no more than $7 per lot including open and close). Even though commission must be paid, the total cost is still lower than brokers offering wide spreads with no commission.

For Swing Traders and Position Traders

Traders who trade infrequently but hold orders for several days or weeks find that cost per trade is not the most critical factor, because profit targets are typically in the tens or hundreds of pips. A difference of 1-2 pips in costs doesn't have much impact. Brokers with no commission but slightly wider spreads may be more suitable, as there's no need to calculate commission separately.

Test with a Demo Account and Calculate True Costs

Before deciding on a real broker, you should open a demo account and trade according to your normal strategy for at least 30-50 trades. Then calculate the average cost per trade and see how much it eats into your profits. If costs consume more than 20-30% of your average profit per trade, this broker may not suit your style.

How to Adjust Your Strategy to Suit Trading Costs

Besides choosing the right broker, you can also adjust your trading strategy to reduce the impact of costs.

Increase Profit Target Above Costs

If your cost per trade is 1.5 pips, your profit target should be at least 5-10 pips so that costs don't eat up too much of your profit proportion. Setting a take profit at 2-3 pips when costs are 1.5 pips means your net profit is very small, and you need a very high win rate to be profitable.

Reduce Unnecessary Trades

Novice traders often trade too frequently without necessity (over-trading), which causes costs to accumulate. Quality trading means waiting for genuinely good opportunities rather than entering orders every time the market moves. Reducing the number of trades by 30-50% but selecting only high-probability setups will help reduce costs and increase efficiency.

Use Higher Time Frames

Scalpers trading on 1-minute or 5-minute time frames often trade dozens of rounds per day, so accumulated costs are very high. Switching to 15-minute or 1-hour time frames will help reduce the number of trades, but profit targets per trade increase, improving the cost-to-profit ratio.

Using Thaifxbook to Monitor True Costs from Trading Statistics

Most traders estimate profit and loss from balance or equity, but don't separately examine how much trading costs eat into profits. Thaifxbook allows you to connect your MT5 account and view detailed trading statistics, including actual commission and swap incurred on each trade.

When you view statistics from Thaifxbook, you will see:

• Total costs paid throughout the trading period (commission + swap)
• Average cost per trade
• Net profit after deducting all costs
• Ratio of costs to total profit

This information helps you decide whether you should change brokers, adjust lot sizes, or change strategies. Seeing the true costs is the first step towards systematically improving your trading results.

Summary

Commission and spread aren't just insignificant small numbers. They are the true costs that eat into your profits every time you trade. Understanding and calculating these costs correctly will help you choose the right broker, adjust your strategy accordingly, and evaluate trading results more accurately. Successful traders don't just look at profit and loss, but at every component that affects the final outcome, and trading costs are one of the critical factors you can control and must prioritise.