Trading Costs

How much does it cost for a trader to make a trade?
• Traders do not take positions on a currency pair at the exact ra rate at which the
te currencies are trading. Instead, there are two rates for the cur currency pair: the bid rate
rency and the ask rate.
• The bid rate is the price at which traders can Bid the pair.
• The ask rate is the price at which traders can Ask the pair.
• This is an example of a currency pair. The Ask rate is higher th than the Bid rate and the
an spread is 3 pips, meaning that if a trader Asks this pair, then the Bid rate of this pair
will have to go up 3 pips in order for the trader to break even.
• The ask rate will always be higher than the bid rate. The differ difference between the bid
ence rate and the ask rate is the spread. The spread is an automatic cost that the trader
incurs when making the trade. Because of this spread, traders wi will take a position they
ll started with a small loss and will need to gain some profit in o order to break even.
rder • For example, if a trader Asks into a position at the ask rate, a and then immediately
nd closes the position at the bid rate, the trader will incur a cos cost equal to the spread.
t These spreads are seen in every kind of market. However, because of the broker broker-based
system in the equities and futures market, it can sometimes be d difficult to identify
ifficult where and how much the spread cost is.