Transaction Costs: Spread, Commission and Financing
This lesson identifies the four costs borne by a CFD position, describes the conditions under which each arises, and demonstrates how to assess a method's profitability after costs.
Risk note: educational content only. This article is not financial advice, investment advice, or a recommendation to buy or sell any instrument. Trading leveraged products can result in losses greater than expected, and each reader should understand the risks before trading.
A trading method that is profitable before transaction costs and unprofitable after them has no practical value. Many new participants evaluate a method on a chart without accounting for the costs incurred in executing it, and consequently adopt approaches that appear sound in principle and lose money in an account. This lesson describes the spread, commission, overnight financing and slippage, sets out the account terms that apply at Onys Kapital, and shows how these costs should be incorporated into the evaluation of any trading method before it is applied with real capital.
The spread
Every instrument is quoted with two prices: the bid, at which the trader may sell, and the ask, at which the trader may buy. The difference between them is the spread, and it is the principal cost of trading on most account types. A long position is opened at the ask price and valued at the bid price, so that it shows an unrealised loss equal to the spread at the moment of opening, before any market movement has occurred. A short position is affected symmetrically.
At Onys Kapital, spreads on the Standard account start from 1.7 pips and spreads on the Pro account start from 0.8 pips. The Standard account requires a minimum deposit of USD 1,000 and the Pro account a minimum deposit of USD 5,000; both provide market execution. Spreads widen around scheduled economic releases, during periods of thin liquidity and at the opening and closing of trading sessions. This widening reflects conditions in the underlying market rather than a discretionary decision by the broker.
Commission
Certain account types are offered with a narrower spread in exchange for a fixed commission charged per lot traded. Whether commission applies to a given transaction, and the rate at which it is charged, depends on the account type and the instrument concerned. The applicable rate is displayed on the order ticket in MetaTrader 5 before the order is confirmed and is set out on the trading conditions page.
For the purpose of cost analysis, commission and spread should be considered together as the round-trip cost of a transaction. A narrower spread combined with commission may or may not be cheaper than a wider spread without commission, depending on the instrument and the size of the position. The comparison should be made in monetary terms for the instruments and volumes the trader intends to use.
Overnight financing
A position held open past the daily rollover time is subject to an overnight financing adjustment, sometimes termed a swap. The adjustment may be a credit or a debit depending on the instrument and the direction of the position, and it reflects the interest rate differential between the two currencies of a pair or the cost of carry of the underlying asset. On one day of each week a three-day adjustment is applied to account for the weekend, during which markets are closed but financing continues to accrue.
Overnight financing does not apply to positions closed before rollover, so intraday trading methods are unaffected by it. For methods that hold positions over several days or weeks, the cumulative adjustment can be material and must be included in the assessment of expected profitability. A swap-free account, which is exempt from overnight financing adjustments, is available at Onys Kapital; the applicable terms are set out on the trading conditions page.
Slippage
Slippage is the difference between the price at which an order is submitted and the price at which it is executed. Between the submission of an order and its receipt by the server, the market price may change. Under market execution, the order is filled at the best available price at the moment of execution, which may be better or worse than the price displayed at submission. During periods of high volatility the difference is more frequently unfavourable.
Slippage does not appear as a separate line on any statement, but its effect on the account is identical to that of any other cost. It may be reduced by trading instruments with deep liquidity during their principal sessions and by avoiding order submission in the seconds surrounding a scheduled release, when the order book is thinnest and the price is moving most rapidly.
Assessing a method after costs
The evaluation of any trading method should be conducted net of costs. The average result per trade, as measured on the chart, should be reduced by the spread, by any commission, by overnight financing where positions are held past rollover, and by an allowance of approximately one pip for slippage on each execution. If the method retains a positive expectancy after these deductions, it warrants further testing.
This assessment should be performed before the method is applied with real capital, not after. A method that trades frequently incurs costs in proportion to its frequency, and a marginal edge is readily consumed by the round-trip cost of each transaction. The demo account, which provides USD 10,000 of virtual funds on the live platform, allows a method to be tested under actual spread and execution conditions without financial exposure.