The Two Cost Models in Forex
Every forex broker charges you in one of two ways — or a combination of both:
1. Spread-only (no commission): The broker makes money from the difference between the buy and sell price. EUR/USD might be 0.8 pips wide instead of the raw 0.0–0.1 pip interbank rate.
2. Raw spread + commission: You get near-interbank spreads (0.0–0.1 pips on EUR/USD) but pay a fixed commission per lot traded — typically $3.00–$7.00 per lot round-turn.
The Real Math — 100 Trades Example
Let's say you trade 1 standard lot (100,000 units) of EUR/USD, 100 times.
Spread-only broker (eToro — 1.0 pip spread):
- 1.0 pip x $10/pip x 100 trades = $1,000 total cost
ECN broker (Pepperstone Razor — 0.1 pip + $7 commission):
- Spread: 0.1 pip x $10 x 100 = $100
- Commission: $7 x 100 = $700
- Total: $800
Winner: ECN/commission model — $200 cheaper over 100 trades.
When Spread-Only Wins
The math flips for very small traders or infrequent traders:
If you trade micro-lots (0.01 lot) or less than 10 trades/month, the fixed commission structure becomes disproportionately expensive. A $7 commission on a 0.01 lot trade represents a massive percentage cost.
Rule of thumb:
- Trading 0.1 lot or larger, multiple times per week: ECN + commission
- Trading micro-lots or occasionally: Spread-only
The spread exists because someone is quoting it. How the interbank market is structured covers who those counterparties are and why their pricing differs.
Hidden Costs to Watch
Beyond spread and commission, always check:
- Overnight swap rates (holding positions overnight) — see forex swap and rollover fees explained
- Inactivity fees (Plus500, eToro charge after months of no trading)
- Withdrawal fees (eToro charges $5 per withdrawal)
- Currency conversion fees (if your account currency differs from the instrument)
This article is for informational purposes only. Past performance is not indicative of future results.
