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How to Calculate Trading Fees and P/L in Forex Market

01 Mar, 2024

6 min

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How to Calculate Trading Fees and P/L in Forex Market

There are several costs that come into play when trading, including spreads, commissions, and swaps. Understanding these costs not only provides insight into your trading well-being but also assists in identifying the essential measures to take in order to reduce risk. While the costs will be calculated automatically by the software (Trading Platform), it helps to know what goes into their calculation. That’s why we’ve compiled this guide on how to calculate spreads, commissions, swaps, and profit & loss in trading. 

Spreads Explained 

When discussing trading fees, the term “spread” often takes center stage. In the world of Forex trading, the process involves swapping one currency for another at an agreed-upon rate. These currency pairs, like USD/CAD, have bid (buy) and ask (sell) prices. The bid price represents what the provider is willing to pay for the base currency (USD) in exchange for the quote currency (CAD). Conversely, the ask price is the amount the provider is looking to sell the base currency for the quote currency. The gap between these bid and ask prices is referred to as the spread.

The significance of the spread in Forex trading is thoroughly explored in a dedicated article “What is a Spread in Forex Trading and How Does it Affect Profits?“. In that guide, we delve deeper into:

  • What is Spread?
    • Types of Spreads
  • How is Spread Measured
  • Spread Costs and Calculations
    • How to Calculate the Pip Value

This article comprehensively covers all the essential information needed to grasp the concept of the spread, including insights on how to calculate it. We strongly recommend reading through this dedicated spread article before delving into other trading fees.

Commissions Explained

Another critical component to be aware of is commission. Unlike the spread, which is the difference between the bid and ask prices, commission is a direct fee charged by the trading provider for facilitating your trades. Commission is essentially a fee that providers charge for executing your trades on the market. It serves as compensation for the services and resources provided by the platform, such as market analysis tools, leverage, and other services.

Types of Commissions

Commission calculation methods can vary among providers. There are two primary types of commission structures:

Fixed Commission: In this structure, traders pay a predetermined, fixed amount for every transaction, regardless of the trade volume or size. This provides transparency, as the commission cost remains constant regardless of the trade’s scale.

Variable Commission: With a variable commission structure, the commission amount fluctuates based on the size of the trade. Larger trade volumes may attract higher commissions, creating a proportional relationship between the trade size and commission cost.

Calculating Commission Costs:

For traders dealing with variable commissions, calculating the commission cost involves multiplying the provider’s commission percentage by the lot size of the trade. The formula is as follows:

Commission Cost = (Commission Percentage / 100) x Trade Size

Many trading platforms offer online calculators to simplify this process. These tools allow traders to input their trade size and commission percentage, instantly providing the commission cost.

Swaps Explained

A swap, also known as rollover or overnight interest, is in contrast to spreads and commissions linked with holding positions overnight and interest rate differentials. These differentials can result in either earning or paying interest depending on the order of your trade and the currency pair involved.

In straightforward terms, when you hold trade on a base currency from a country with a higher interest rate than the quoted currency from a country with a lower interest rate, you earn a swap and the other way around. For instance, holding USD/JPY today means you receive a swap each night just for holding it. This is due to the interest rate in the US set by the Federal Reserve (FED) at 5.50%, significantly higher than the Bank of Japan’s (BoJ) interest rate of only 0.1%.

Remember that the swap is three times larger than usual if you maintain your position overnight from Wednesday to Thursday. This phenomenon is attributed to the impact of the futures market. A swap involves extending the value date on the underlying futures contract. So, if a position was initiated on Wednesday, the value date is shifted to Friday.

Calculating Swaps:

Understanding how to calculate swaps is crucial for traders seeking to manage their positions effectively, especially when holding them overnight. The formula for calculating swaps is:

Swap = (Swap Rate / 100) x Trade Size (Units) x Number of Nights

LotVolumeUnits
Standard1.00100,000
Mini0.1010,000
Micro0.011,000

Let’s say you’re holding a long (buy) position in USD/JPY with a swap rate of 2.50%, a trade size of $10,000, and planning to keep the position for two nights (from Monday to Tuesday, and from Tuesday to Wednesday).

Swap = (2.5 / 100) x 10,000 (units or 0.1 lots) x 2

Swap = $5

Understanding swaps and their calculation empowers traders to make informed decisions by considering factors like interest differentials. This knowledge allows traders to potentially earn additional profits by strategically holding positions over a span of days or even weeks.

Profits & Losses Explained

Now that we’ve covered spreads, commissions, and swaps, let’s delve into calculating profits and losses when trading in the Forex market. This section will provide insights into understanding the financial outcomes of your trades and how to calculate them effectively.

Calculating Profits & Losses

Determining profits and losses in Forex trading involves considering various factors, including the direction of your trade, the size of your position, and market movements. Below are examples illustrating how to calculate profits and losses for both buy and sell positions.

Close Trade:

Profit / Loss = (Open Price – Close Price) x Trade Size (Units)

Buy Trade (EURUSD):

Open Price: 1.1200, Close Price: 1.1300, Trade Size 0.10 Lot

Profit / Loss = (1.1300 – 1.1200) x 10,000 (units)

Profit / Loss = $100

If the trade is still open, we substitute the “Close Price” with the “Current Ask Price” and proceed with the calculation using the same method.

Profit / Loss = (Open Price – Current Ask Price) x Trade Size (Units)

Conclusion

To sum it up, understanding spreads, commissions, swaps, and profits & losses is like having a guidebook for trading fees. It’s not just about numbers; it’s the roadmap to smart decision-making in your risk management.

*In the context of this article, when we refer to a “provider,” we are talking about any company or institution that grants access to liquidity in trading. This category includes brokers, banks, and other entities that serve as facilitators for participating in financial markets.

Article topics

Commission
forex
Profit & Loss
Spread
Swap

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