I’m a little confused with calculating the spread cost. I feel like I’m missing a step with the actual cost.
The formula I am working with is
So we are trading ECN style and we go long for 5 standard lots with AUD/USD 1.04970/1.04980 that means your spread is
Spread = 1.04980 - 1.04970 = 0.00001 pipettes or 1.0 Pips
Which means your actual cost is
Spread cost = 1pip x 5 lots x $10 pip cost per lot = $50
So that spread of $50 is already included in the spread so the actual transaction to open would be
Cost to open your position = 500,000 (5 lots) x 1.04980 = USD524,900 (of which $50 is spread cost?)
Now if we compare this to a Standard account (not ECN style) where 1 Pip is added to the spread. My understanding is the spread would now look like this 1.04965/1.04985 (where 0.05 is taken off the bid and 0.05 is added to the ask price. This means my calculation is
Spread - 1.04965 - 1.04985 = 0.00002 pipettes or 2.0 Pips
Which means your actual cost is
Spread cost = 2pip x 5 lots x $10 pip cost per lot = $100
So that spread of $100 is already included in the spread so the actual transaction to open would be
Cost to open your position = 500,000 (5 lots) x 1.04985 = USD524,925
By my reckoning - the difference between the cost to open your position for Standard vs ECN style should be $50 but I’m only getting $25.
What am I missing?
I get that the standard added 0.05 to the asking price and not 1.0 which would result in the $50 the gap but the broker said it 0.05 on each of bid and ask.
The only other thing I can think of is Spread cost is round-turn but not applied on each sideways trade. In other words, i don’t apply the spread when I go short to exit the trade. That doesn’t sound, right?
Note: I’m not worried about the commission cost ie. $3.5 for this execise.
1.04970 is the Bid price = what they will pay you if you sell at that time
1.04980 is the Ask price = what they will charge you if you buy at that time
These both move up and down as the “price” moves.
The spread as you say is the difference between the 2
But you NEVER pay “the spread” - All you do is “Buy the ask” and “Sell the bid” - the “SPread” takes care of itself and in fact it changes as market condition changes. Nothing you can do about it except perhaps find a broker quoting narrower spreads ?
The spread IS your cost - imagine in simple terms - price is always quoted as the buy and sell price - the difference being the spread.
So imagine you bought at 10, spread is 2 and price does not move - you decide to exit the buy - you sell at 8.
Cost of trade is 2.
If price happened to rise by 2 then you could exit at breakeven.
Brokers quote a narrow spread but when risk to them increases they will widen the spread to say 10 - thus if price were to rise by 10 then you are only at breakeven.
Total Cost = ( Spread ) x ( Pip Cost ) x ( Number of Lots Traded )
So as I read it
ECN Style is (wouldn’t there is still be a spread cost, just no extra markup by the broker?)
Total Cost = Commission + ( Spread ) x ( Pip Cost ) x ( Number of Lots Traded)
Non ECN has a wider spread so no commission so
Total Cost = ( Spread ) x ( Pip Cost ) x ( Number of Lots Traded )
So is what I have stated correct? or does this formula only apply for standard type accounts? (not commission accounts).
Also is the cost applied for each side of the trade (ie go long and then go short) or just once when you open the trade?
Total Cost = ( Spread ) x ( Pip Cost ) x ( Number of Lots Traded )
So as I read it
ECN Style is (wouldn’t there is still be a spread cost, just no extra markup by the broker?)
Total Cost = Commission + ( Spread ) x ( Pip Cost ) x ( Number of Lots Traded)
Non ECN has a wider spread so no commission so
Total Cost = ( Spread ) x ( Pip Cost ) x ( Number of Lots Traded )