Most new traders think of the market as a place where price either goes their way or it doesn't. In practice, every trade carries a toll before price has moved at all. That toll comes in three forms: the spread, slippage and, with some account types, commission. Understanding them will not make you a better forecaster, but it can stop you from running a strategy that cannot possibly win after costs.
The spread: your entry fee
Every currency pair has two prices at any moment: the bid, where you can sell, and the ask, where you can buy. The difference is the spread. If EUR/USD shows 1.1231 / 1.1233, the spread is 0.0002, or two pips (on a pair quoted to four decimals, one pip is 0.0001; see pip value explained). If you buy and immediately close, you sell at the bid and lose the spread. That is the minimum you start behind.
Spreads come in two flavours. A fixed spread stays the same regardless of conditions, which sounds comforting but usually means the provider widens it in practice through requotes or rejected orders when markets move. A variable spread floats with liquidity: tight when the market is deep, wide when it is thin. Neither is better in itself. What matters is the typical cost at the times you actually trade, which you can only learn by observing it.
Why spreads widen
- Thin liquidity. Late in the New York session, around the daily rollover and over weekends, fewer participants quote prices, so the gap grows. Our guide to trading sessions shows when the market is deepest.
- Event risk. Around major releases such as inflation or payrolls, liquidity providers pull back or quote wider to protect themselves. A pair that normally costs one pip may cost five or more for a few seconds.
- Exotic pairs. Currencies with lower volume, such as USD/ZAR or USD/TRY, carry structurally wider spreads than EUR/USD or USD/JPY.
Slippage: the gap between expected and filled
Slippage is the difference between the price you expected and the price you got. It can be negative or, occasionally, positive. It occurs mainly with market orders and stop orders, because both say, in effect, "fill me at whatever is available." A stop-loss is a market order once triggered, so in a fast move it can fill several pips beyond the level you set. Limit orders avoid negative slippage but carry the risk of not filling at all. For a refresher on how each behaves, read order types explained.
Slippage is not evidence of a dishonest broker. In fast markets there simply may be no liquidity at your price. What is worth tracking is whether slippage is roughly symmetrical over many trades. If you consistently lose a pip and almost never gain one, that is a pattern worth raising with your provider.
Commissions and other fees
Some account types offer a raw spread, close to the interbank level, plus a commission per lot. Others bake all costs into a wider spread. To compare them fairly, convert everything to pips per round trip. As an illustration only, a 0.2 pip raw spread plus a commission equivalent to 0.7 pips costs 0.9 pips; an account with a flat 1.2 pip spread and no commission costs 1.2 pips. Overnight financing (swap) is a further cost or credit if you hold past the daily rollover, covered in the carry trade article.
Why cost matters more for short-term trading
Costs are fixed per trade, while the average move you are trying to capture varies with your timeframe. Consider two illustrative traders who both pay 1.5 pips per round trip.
| Style | Average target | Cost per trade | Cost as share of target |
|---|---|---|---|
| Scalper | 5 pips | 1.5 pips | 30% |
| Intraday | 25 pips | 1.5 pips | 6% |
| Swing | 100 pips | 1.5 pips | 1.5% |
The scalper must be right far more often just to break even. If that trader's raw edge, before costs, is 2 pips per trade, costs leave only 0.5 pips, and a slightly wider spread at the wrong hour erases it. The swing trader barely notices the same wider spread. This is why a strategy that backtests beautifully on mid-price data can fail live; see backtesting honestly.
How to measure your own cost
- Log spread at entry. Add a column to your trading journal for the spread when you clicked. Over 50 trades you will see your real average and the worst cases.
- Log intended versus filled price. The difference on each market or stop order is your slippage. Sum it per month.
- Add commissions and swap. Convert all of it to pips or to account currency per trade.
- Compare to gross edge. Take your average winner and loser before costs, then after. If the after-cost expectancy is near zero, costs are your biggest opponent.
Practical ways to reduce cost
- Trade the most liquid pairs during their most active sessions.
- Avoid opening positions seconds before a major release unless that is a deliberate, sized-down decision.
- Use limit orders for entries where you are not in a hurry.
- Compare account types on total round-trip cost, not on headline spread.
- Size positions with the stop distance and the spread in mind: a 5 pip stop on a pair with a 2 pip spread has effectively a 3 pip cushion on the paying side. See position sizing.
The takeaway
Costs are one of the few things in trading you can measure precisely and partly control. They do not make headlines, yet over hundreds of trades they decide whether an average edge turns into a positive account balance. Before you judge a strategy, judge it net of the spread, the slippage and the fees you will really pay.
Educational content only; not trading advice. All numbers are illustrative.