In this report, I will be breaking down a common sales tactic in the trading industry that often catches many traders out. I will continue to release frequent reports and articles to you, giving you valuable insights from a professional approach to the markets. By staying up-to-date with my findings, you will be able to tap into the knowledge I have gathered from over 10+ years in the financial markets, putting you in a position to avoid common mistakes and take advantage of what this extremely prolific industry has to offer.
The history of the foreign exchange markets has been centred around large institutions and high-net-worth individuals transferring currencies from one into another for reasons including enterprise, speculation, and investment. Through technological advancements in the modern era, the financial markets transformed on a global scale allowing anybody to take advantage of market moves. But in order for what would be considered a small account to participate in the markets, an individual requires a brokerage to be the intermediary between the live markets and themselves. A trader must use a brokerage to provide them the service in the market, whilst facilitating the use of leverage, to place live positions.
The broker operates by offering a variety of services in exchange for a commission to compensate for the cost of business. This was traditionally done through a small spread between the bid and ask price and a fixed commission charge. Over time, through natural competition between brokerages and continued technological advancements, the costs of trading have fallen to all-time lows. Broker fees are now extremely inexpensive in comparison to what they were many years ago.
The most common service that a broker provides is what is known as a ‘standard account’. This is an account type that charges a spread, with no commission. This single fee is hardly noticeable as the trader places the trade in the same way, but the fee is paid upfront, the moment the trade is placed. The total fee varies, based on the lot size placed by the trader and the spreads available at the time. The more liquid an instrument is, often the lower the spread. Therefore, the major currency pairs generally have lower costs than say exotics, in ‘normal’ market conditions.
Spreads have tightened considerably over recent years and are often unnoticeable when accounted for. Remember that a brokerage is essential for a trader to be able to trade. Without one, an individual who is not considered high-net-worth and, or has large banking networks, would not be able to participate in the market. They must have a cost to cover their own expenses to exist in the first place in order for you to be able to trade.
This was widely accepted by the trading community on an international scale and the default for the majority of brokers. However, more recently, the industry has changed with the introduction of ‘Raw Spread’ or ‘Pro accounts’. This marketing scheme by a few brokers has now become industry standard and expected by many naive traders unbeknownst of what they actually represent.
These ‘Raw Spread’ accounts are in reality no different from standard accounts, which I will prove; in fact in certain situations can be inferior to a standard account. With these accounts, rather than paying a spread, the trader will be charged a lower spread but instead charged a commission to the account for either side of the deal.
Having taken the retail trading industry by storm, many neophyte traders believe that this is the only way to trade effectively. It seems that only professionals actually understand this flawed logic and I am going to prove it.
Breakdown
Let’s say, you have a trade on EUR/USD, the most traded currency pair:
Scenario 1 is a standard account with a 0.9 pip spread.
Scenario 2 is a pro account with 0.2 pip raw spread and $3.50 commission.
You place a 1.00 lot position size on a USD account. This equates to $10 per pip.
Scenario 1, you would pay 0.9 x $10 = $9 in total fees.
Scenario 2, you would pay 0.2 x $10 = $2. Plus $3.50 for entering and $3.50 for exiting. $2 + $7 = $9 in total fees.
Scenario 1 = Scenario 2.
The spreads will vary from broker to broker, but will generally work out the same. You can work out your own sums, changing the figures based on what a broker is offering, and see for yourself.
Remember, if a brokerage offers both, they will work out the same. Why would they offer the same product at different prices?
Adjustment
Now many traders see that and understand it but still ignore it regardless. They prefer to have a lower spread but pay a commission even if it works out the same.
The first myth that I will debunk is that their trade is in more profit so “it feels better”. Yes, you could be up the spread difference in the trade, but you have the commission yet to be applied to your balance anyway. When you factor in due commission, you are not in a positive any more than you would be on a standard account. Work out the difference for yourself. It will add up to the same amount. Just because your trade is in the blue, doesn’t mean it actually is.
The best way to see this is by going to your trading history and right-clicking, selecting to show the commission tab. This will show how much you are ‘actually making’ from your raw spread account.
The second one is adjusting your trade. Many traders claim that they are less likely to be stopped out with a pro account. Firstly, just because you have been stopped out by one pip does not mean that if you had a lower spread you wouldn’t have been – it happens to all of us and will happen anyway. That is often just confirmation bias. What you have to do is adjust your trade. Factor in the spread with your stop-loss. The purpose of a stop-loss is as a worst-case scenario that you exit the trade – not a gambling method to try to get rich quickly.
I used an example in the Samuel & Co Trading Discord community where I stated it is like going into a bar and ordering a drink. The one person pays the price for a drink and that is it. The other person gets the same drink but cheaper – but on their way out has to pay a fee to exit the bar. The price in the end, for both individuals, equates to exactly the same amount.
Conflict of Interest
Now some of you may be using a broker that has a more favourable spread or commission charge. You may work out the sums and it works out slightly more cost-effective than the examples I have used. Your trading costs may be lower. If so, congratulations. But remember, it doesn’t stop there.
Firstly, you may not be placed directly in the live markets. Many brokerages may be taking the other side of the position, giving them a conflict of interest against you. You could see price manipulations as it is in their benefit that you lose. They may be taking a hit on the trading costs, for a greater return on investment when you start trading. The amount of money they make on your losing trades could significantly outweigh the initial trading costs. We know that a large majority of traders lose money so this is not uncommon.
It goes back to the razor-razorblade model. This is a classic sales strategy used by companies all over the world, all the time. The model incorporates an initial discounted product alongside an additional required companion product that is sold at a premium. To put it simply, you may see a razor that is sold at a cheap price. Consumers purchase the product because of this leading to a large number of sales.
The company may only breakeven or have significantly lower profit margins on this razor, (sometimes even take a loss). However, the razor may require a detachable replacement razorblade that is only available from that company, generating the majority of the profit due to the mark-up made on that product. Many brokers offer extremely high leverage, such as 1:1000, or low trading costs could be doing this.
You will need to do your own due diligence on this and I cannot advise. All I know is that I personally want a broker’s interests to be aligned with mine, especially when trading large sums on a daily basis as I do.
Non-trading Costs
What is also essential is considering the non-trading costs for a broker. A brokerage that appears more competitive by providing lower trading costs (spreads and commission) may offset these with higher non-trading costs. These costs can be anything from deposit/withdrawal charges to inactivity fees. These hidden fees sometimes can only be understood once a trader has registered for a trading account. One fee, such as a withdrawal charge, could exceed many months of total trading costs from another broker.
I will also mention swap fees, even though they would be considered a trading cost. If you are not aware the swap/rollover fees are the interest rate difference between the two currencies you are trading. These are charged for any trades open at the rollover time, where the contracts reset for the next day. This is often around 22:00 pm GMT, which is why spreads tend to widen at the time as the liquidity adjusts to the changes. As they are an interest charge, traders can earn a positive swap or pay swap, which is taken from the profit/loss of a trade. These charges cannot be avoided and are industry standard. However, some brokerages may charge a mark-up on these fees. You may want to compare the differences to see this for yourself as you could be paying more than what is considered ‘reasonable’ for a swap fee.
When you factor all of this in, it is particularly interesting how many brokers will advertise their spreads everywhere, but keep the non-trading costs hidden.
Conclusion
As you can see, there is far more to trading with a certain brokerage over another than just spread. Many amateur or beginner traders tend to only focus on this when it comes to choosing a broker, whereas professionals understand there is far more to it.
I see and hear retail traders speak about spread all the time. They may blame the spread for why they aren’t profitable. It is only when you start to fully understand the industry, with valuable insights like this do you realise how foolish it is.
You never hear professionals complain about the spread, I wonder why?
In my experience, I only hear unprofitable traders complain about spread – just as with leverage. Like with my previous report, I exposed the need for high leverage and now I have exposed what I would define as the ‘Spread Myth’. I hope you have benefitted from these valuable insights.
Personally, for me, I prefer trading with a small spread and no additional costs, with a brokerage that wants me to win. I want to pay a low spread and nothing else. This is why I trade with YLD FX.
