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Are you aware you are paying 4 x spreads to some brokers for one trade?

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dolemi
145
dolemi  

Are you aware you are paying 4 x spreads to some brokers for one trade?

I have reviewed all of my trades, and have discovered this rule for some pairs.

There are lots of hidden rules we are not aware of.

Demos Stogios
197
Demos Stogios  
Ok, but what about execution of orders? I have seen a comparison, where if you add the slippage in the equation, the total cost of the trade is about the same. For example, you may have 2.5 pips of spread in broker A, but you get a slippage of about 1 pip; at the same time, other brokers, offering you a spread of 1.5 pip have a much greater slippage. 
Alain Verleyen
Moderator
31600
Alain Verleyen  
dolemi:

Are you aware you are paying 4 x spreads to some brokers for one trade?

I have reviewed all of my trades, and have discovered this rule for some pairs.

There are lots of hidden rules we are not aware of.

What are you talking about ?
dolemi
145
dolemi  
angevoyageur:
What are you talking about ?

1) when you open an order, you use spread (buy higher price, sale lower price),

2) if you use different currency, you use spread to convert currency first,

3) when you close an order, you use spread (buy higher price, sale lower price),

4) after close an order, the currency have to convert back to your account currency, use spread again.

so it is 4 times unless you do not need to convert currency.

whroeder1
15062
whroeder1  

When you buy you pay the spread immediately, there is no spread when you close. When you sell, there is no spread when you open, you pay the spread when you close the order. 1 and 3 are wrong.

The broker uses his money to buy or sell, that is called leverage. He converts the profit/loss of the trade to your currency and changes your balance. There is no spread involved. 2 and 4 are wrong.

dolemi
145
dolemi  
WHRoeder:

When you buy you pay the spread immediately, there is no spread when you close. When you sell, there is no spread when you open, you pay the spread when you close the order. 1 and 3 are wrong.

The broker uses his money to buy or sell, that is called leverage. He converts the profit/loss of the trade to your currency and changes your balance. There is no spread involved. 2 and 4 are wrong.

For example, suppose:

Home Currency: USD
Currency Pair you are trading : GBP/CHF
Base = GBP; Quote = CHF

1) You convert USD to CHF, using lower USD/CHF Bid price, 1.1025 so you get less CHF (Ask price = 1.1055, Bid price 1.1021, 34 pips spread lost)

1 USD = 1.1021 CHF,  not 1 USD = 1.1055 CHF,

2) Open BUY order, you use CHF to buy GBP, and hold GBP for gain profit

Opening Rate = 1.43130 (Ask 1.43130, Bid 1.43125, 5 pips spread lost), you use higher Ask price to buy GBP by using CHF and get less GBP

1 GBP = 1.4313 CHF,  not 1 GBP = 1.43125 CHF

3) Close BUY = Sell GBP to get CHF back

Closing Rate = 1.43225 (Ask 1.43230, Bid 1.43225, 5 pips spread lost), you use lower Bid price to sell GBP get less CHF

1 GBP = 1.43225 CHF,  not 1 GBP = 1.43230 CHF,

Units = 100,000 you have leveraged

Then:

Profit (in CHF)= (1.43225 - 1.43130) * 100,000

4) Convert CHF to you home currency USD, using higher USD/CHF Ask price 1.1255 get less USD,(Ask price = 1.1255, Bid price 1.1221, 34 pips spread lost)

1 USD = 1.1255 CHF,  not 1 USD = 1.1221 CHF,


At end, you have gained 95 pips in CHF, but you gotten not much profit in USD.

You can work out the Profit (in USD), but all the ways you are losing a little bit value, because your size are leveraged, so the lost can not be ignored.

If you buy an iPhone $400, you pay $400, and shop gets $400, no spreads in between, the spreads are the fees that banks and brokers taken as fees. The more converting, the much more value you are losing. The above case, it has 4 times converting, it has 4 times fees been charged, ie, 4 x spreads you have paid.

Keith Watford
Moderator
10001
Keith Watford  

When you open a Buy position, you buy at Ask.

Your trade is then immediately valued at Bid, so you pay the spread.

When you close the position, it is closed at Bid and there is no further cost for the spread because it is already valued at Bid.

When you open a position, there is no conversion from your account currency.

With GBPCHF, you effectively borrow CHF to buy GBP.  If the position is held overnight, you will pay interest on the CHF you have borrowed and receive interest on the GBP. That is the swap.

When you close the position, profit or loss is in CHF, so this needs to be converted to your account currency. To be honest, I don't know what rate they use, Ask, Bid or Mid, but as a percentage the cost would be extremely small. 

dolemi
145
dolemi  
GumRai:

What WHRoeder and GumRai said are correct that based on what brokers(not all of them) told you. What WHRoeder said is exactly same as some brokers words.

However the brokers do not tell you how the currency convert, what rate to be used, we assume that is a fix rate covert from both sides without extra costs, but the facts I have discovered are not same.

We  all agree paying the spread at open time.

At close time, no further cost for the spread, that is correct. However you look at the above case, you have gained 95 pips in CHF, the market gained 100 pips in CHF, that you get 5 pips less profit. If you are lose, then you will get more 5 pips lose. That is another way you are paying spread, but it looks better that brokers or banks do not charge you 5 pips from your account. Actual you are paying the spread to someone.

Converting, "with GBPCHF, you effectively borrow CHF to buy GBP," when you borrow CHF, not USD, that you need convert, you can work out all the history trades, you will discover it has converts, the convert rates are changes, and brokers never tell you. It has Ask, Bid and spread involved. The costs are not small, I thought it is small, but not, it is leveraged. I hope I am wrong. The commissions and rollover fees are extra costs.

Please try to figure out your old trading profits, you will find the same results as I did. Or you can ask your brokers to tell you how your profit comes out for a cross pair, I think it is hard to get the answer from them. I have asked few brokers, one of them refuses to tell me the method, nor the formula to calculate it.

I believe most of the traders, even traded ten years, still not aware those rules and none tells you about it. 

Keith Watford
Moderator
10001
Keith Watford  

 Converting, "with GBPCHF, you effectively borrow CHF to buy GBP," when you borrow CHF, not USD, that you need convert, you can work out all the history trades, you will discover it has converts, the convert rates are changes, and brokers never tell you. It has Ask, Bid and spread involved. The costs are not small, I thought it is small, but not, it is leveraged. I hope I am wrong. 

 You are wrong, only the profit/loss is converted to the account currency, leverage doesn't come into it.

Please try to figure out your old trading profits, you will find the same results as I did. Or you can ask your brokers to tell you how your profit comes out for a cross pair, I think it is hard to get the answer from them. I have asked few brokers, one of them refuses to tell me the method, nor the formula to calculate it. 

 I have checked it and it comes out as I expect it to

 I believe most of the traders, even traded ten years, still not aware those rules and none tells you about it. 

That is because these "rules" only exist in your head 

dolemi
145
dolemi  

 You are wrong, only the profit/loss is converted to the account currency, leverage doesn't come into it.

Is this correct?

Profit = (Close Price - Open Price) * Leveraged Size * Converting Rate

where do you get your Converting Rate? and why?


 I have checked it and it comes out as I expect it to

Please provide an example and show how do you calculated the profit. Please provide your converting rates and the date and time when trade open and close, so other people can verify it.

Could you please work out the profit in your way?

Home Currency: USD
Currency Pair you are trading : GBP/CHF
size 1 from MT4
Buy GBP/CHF
When you open an order:  
   GBPCHF : Ask 1.43130,Bid 1.43125
   USDCHF : Ask 1.1055, Bid 1.1021
When you close the order:
   market gains 100 pips of GBPCHF
   GBPCHF : Ask 1.43230, Bid 1.43225
   USDCHF : Ask 1.1255,  Bid 1.1221
How do you work out the profit? What is the profit in your account, exclusive commissions and rollover fees?
Keith Watford
Moderator
10001
Keith Watford  

 

 Here is a recent Buy on EURJPY account in USD

Buy at 133.687

Closed at 133.780

Profit per unit = 133.78 - 133.687 = 0.093 Yen

0.5 lots, so 50,000 units

Profit = 50,000 x 0.093 =  4650 Yen

Profit in $ = 37.91

Conversion rate = 4650/37.91 = 122.6589

Close time near to close of 13:15 candle

USDJPY 13:15 Candle closed at 122.6560, The difference is negligible. 

Even if the best bid price (lowest had been used from that M1 candle, the profit would only be increase by a maximum of a half cent and evem that we cannot be sure of because profit and losses have to be rounded to whole cents. 

 

Is this correct? 

Profit = (Close Price - Open Price) * Leveraged Size * Converting Rate 

 Leverage has nothing to do with profit on a trade, I have no idea what you are trying to calculate here.

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