When you open a forex trading account, you will be told by your forex broker that there are no commissions involved in currency trading. Most of the new traders take their broker words as true. They think that the cost of trading is minimal.

Forex brokers are also called FCMs (Futures Commission Merchants) sometimes. They make profits through the bid/offer spread they charge their clients for each currency pair. This bid/offer spread is your trading cost and profit for your broker.

Lets do a simple calculation. Spreads are usually overlooked by the individual traders as the price they pay for trading. So lets calculate your cost of trading.

Suppose, you are day trading the currency markets, 5 times every day. Take away the weekends, when you cant trade, there are 250 trading days for you.

As a day trader, you will open and close each trading position before the end of each trading day. That means each position is being traded 2 times, once when you open the trade and once when you close the trade.

Suppose; your start with a deposit of $50,000. You use a leverage of 4 only, you are being cautious. So this $50,000 deposit will control (50,000) (4) = $200,000.

Annual Turnover = (5) (250) (2) (200,000) = $500 Million. You can see the annual turnover of your trading is huge! Now lets calculate how much your broker will make and what your trading cost is based on your spread cost. Spread Cost= (Annual Turnover) (spread)/2.

Suppose the spread offered by the broker is 3 pips. 3 Pips Spread Cost= (500M) (0.0003)/2= $75,000.

Suppose, the spread offered by the broker is only 2 pips. 2 Pip Spread Cost= (500M) (0.0002)/2= $50,000.

You can see now, the cost of trading with a 3 pips spread versus a 2 pips is $25,000. Huge for you, this is 50% of your account equity. You see now that a 1 pip difference can result in $25,000 more as trading cost for you.

You will need to make a profit of $75,000 simply to break even with a 3 pips spread. Trading costs are one of the primary reasons most active traders fail in the long run.