Evidently I have misunderstood the transaction cost of opening & closing a trade.
I used to think it goes this way:
GBPUSD: 1.3200/1.3202
Buy @ 1.3202
Hold for 1 nano-second (hypothetical)
Sell @ 1.3200
Loss/Transaction cost = 2 pips. That’s it. Broker makes money by selling the “asset” to us at higher price and buying back at lower price. Just like money changer.
Instead, it goes like this:
Same GBPUSD Quote.
Buy @ 1.3202
Pay Half-spread: 1-pip.
Hold for 1 nano-second
Sell @ 1.3200
Pay Half-spread: 1-pip.
Total Loss: 4 pips. Double.
Edit: I received wrong information from the broker’s chat agent. After trying it out myself in the platform it is indeed Scenario 1 that is true, you are only charged 1-spread for the round trip.
what makes you think “it goes like this”? Where does this belief come from please?
I contacted my broker through the live chat service, explained the situation with the above exact (if not close) example, and they reply with scenario 2 (4 pips instead of 2). So I thought that’s how it goes… since they’re the broker and all… is this wrong? I have the chat transcript saved for future reference.
Have you done this? It would be simple to take a tiny position for a few seconds and see how it turns out.
I stand corrected. I just tried this and indeed it was charging only 1x spread amount for the round trip instead of double. It seems I received wrong information from the broker’s chat agent… it’s not the first time.
I don’t know why I didn’t just try it out in the first place, it was simple enough to do
I just tried it myself on the platform and indeed it was charging only 1x spread for the round trip. It seems I received wrong information from the broker’s agent. I’ll edit the original post.
Your broker isn’t IG is it by any chance - they like to suggest you pay half the spread when opening a position and the other 50% when closing the position - it’s confusing as hell to people who are starting out.
I have heard it expressed this way but its incorrect and doesn’t help anyone understand the costs: if your only costs is spread, it costs nothing to open a position.
I suppose in hindsight, the moment you open a position you are at an immediate P&L loss which is the total spread multiplied by the position size. It’s all swings and roundabouts.
Would it be accurate if I say that I only care about the opening and closing price, and calculate my P/L that way? If [close - open] = 30 pips then that’s my profit/loss, doesn’t matter the spread when I open and when I close the position.
I’d still pay close attention to the spread - you’re right from a calculation point of view when working on your P&L, but…
when reading the charts you still need to take into account that when you open a long position you will be closing it on the sell price, and when you open a short position you will be closing it on the buy price.
There’s lots of posts here in this forum off new speculators saying “hey, my level was hit, here is the chart, why was my trade not closed and my profit booked. Here is the screen shot showing it”…
You’d be surprised just how many times a 2 pip spread between the buy and sell price results in a 100 pip profit withering away just because you narrowly missed the respective quote/bid
You should always allow for the spread, it doesn’t usually make a big difference but if your trade sizes are small, so the proportion of cost due to the spread increases. Obviously if you have a 2 pip spread and are looking to make a profit of 10 pips, price must move 12 pips, or 20% more, in order to cover both your profit target and spread cost.
In such trades, its very important to remember that spreads can open out, especially around news announcements or during overnight sessions. So a spread that you see at 2 pips at midday can become 4 pips at midnight or 4 pips right before an interest rate announcement. This has implications for where you should set your stop-loss if trading tiny pip totals.
