It seems look on the net these days companies are touting how you can trade Forex without commissions. This attracts a lot of attention and leaves some new traders under the impression that they can actually trade in the Forex market for free.
Trading Forex without commissions is not the same as trading Forex without costs. All Forex trades have transaction costs. These transaction costs come in the form of what is known as the spread. The spread is the difference between the bid and the ask price and is measured in pips. A pip has been designated as the smallest move within a particular Forex market. A typical spread for the EUR/USD might be three pips which translates into $30 US.
It would be great if we could all trade Forex for free, but the fact that there are transaction costs involved is not a bad thing. We simply have to make sure as traders that are particular trading methods produce enough profit per trade to overcome the transaction costs. If, for example, we take the EUR/USD example above and the average profit per trade before transaction costs was only 30 dollars, then our profit after transaction costs would be zero. You and I both know of course that there is no point in trading a system whose outcome is simply break even.
Forex trading transaction cost become particularly important when we are looking at the track records of various Forex trading systems. This is especially true of trading systems that trade with a high frequency. The higher the frequency of trades the higher the level of transaction costs. There are numerous systems that look great and have beautiful equity curves but unfortunately would fail miserably in real time when real transaction costs were added.
Can You Really Trade Forex For Free?
