Calculation of foreign exchange transaction fees

2023-06-15
Summary:

The collection of foreign exchange transaction fees is necessary for traders, as trading platforms need to maintain their own operations and services and also need to pay related costs.

Foreign exchange transaction fees refer to the necessary costs and expenses that investors need to incur in foreign exchange transactions. However, unlike the method of collecting fees in both directions for stocks, foreign exchange transaction fees are collected in one direction. In addition, foreign exchange transactions are all completed on foreign exchange platforms, so understanding and comparing the amount of foreign exchange transaction fees can also help traders better screen out the platform. So to have a comprehensive understanding of foreign exchange transaction fees, it is necessary to understand the components of foreign exchange transaction fees.

Calculation of foreign exchange transaction fees

Foreign exchange spread

In foreign exchange transactions, the most common handling fee is the spread fee. The spread is essentially the difference between the buying price and the selling price. Because traders often trade one currency with another, foreign exchange trading currencies are often quoted based on prices compared to another currency. For convenience, these currencies are written in paired form.


For example, the exchange rate for converting euros into US dollars is 1.4500, while the exchange rate for converting US dollars into euros is 1.4503. The difference between this pair of currencies is 0.0003.


Spread can seriously affect the returns of trading strategies, even more so than traders believe. As a trader, the goal is to buy at a low price and sell at a high price. A high spread means buying at a high price and selling at a low price. A half-point spread may not sound like a lot, but it can often turn a previously profitable trading strategy into an unprofitable one. So the spread fee in foreign exchange transaction fees is the most important factor we consider when considering platform transaction costs.


The commission fee is a special component of foreign exchange transaction fees, as most foreign exchange trading platforms include the commission fee in the spread fee. However, some trading platforms still separate the spread fee and commission fee, and the main payment method is to add the commission fee for each transaction to the lower spread. So whether traders need to pay additional commission fees depends on the rules of the trading platform they choose.


Sliding point cost

Sliding point refers to the difference between the point of placing an order and the point of the final transaction. On the one hand, the sliding point in foreign exchange transaction fees is due to hardware factors such as severe market fluctuations, network delays, software systems, and server responses, resulting in inconsistent transaction prices and listing prices. The second factor is human factors, such as the possibility of artificial manipulation by the platform backend in theory, which leads to differences between the quoted prices of the foreign exchange trading platform and the actual prices, resulting in foreign exchange traders not buying in a timely manner when it is time to buy and not selling in a timely manner when it is time to sell. Generally speaking, it is difficult for investors to distinguish what factors are causing the sliding point, thus giving some unscrupulous traders the opportunity to illegally profit. So it highlights the importance of screening legitimate foreign exchange trading platforms.


Other foreign exchange transaction fees

The most common other foreign exchange transaction fee is overnight interest. Many foreign exchange traders often overlook overnight interest fees. If you need to hold a position for more than a day, the broker will charge you an overnight interest fee, which cannot be ignored. Holding a position for a long time is also a fee, and the specific fee depends on how the broker charges it.


The calculation formula for foreign exchange transaction fees varies among traders, but the following are some common calculation formulas:

1. Calculation formula for point difference: handling fee=transaction volume spread

For example, if you trade 1 lot (100000 units) of euros or dollars at a buying price of 1.2000 and a selling price of 1.1995, with a spread of 0.0005, the handling fee is:

Handling fee = 100000 0.0005 = $50


2. Calculation formula for fixed handling fee: handling fee=fixed handling fee

For example, if your dealer charges a fixed handling fee of $10 per transaction, the handling fee for trading one transaction in euros per dollar is $10.


3. Calculation formula for transaction volume discount: handling fee=transaction volume discount ratio

For example, if your dealer charges a handling fee based on the following discount ratio:

Transaction volume less than $100,000: 1 transaction fee of $10

Transaction volume between $100,000 and $1 million: 1 transaction fee of $9

Transaction volume greater than $1 million: 1 transaction fee of $8

So, if you trade 1 Euro/USD with a transaction volume of 100,000 USD, the handling fee is:

Handling fee = $100,000 0.09 = $9000


4. Calculation formula for implicit handling fee: handling fee=transaction price implicit handling fee ratio

For example, if your trading price is 1.2000, but the dealer adds an implied handling fee of 0.0005 to the price, the actual trading price is 1.2005, and the handling fee is:

Handling fee = 100000 one point two zero zero five 0.0005 0.0005=60.25 USD


Different dealers may adopt different fee calculation methods and formulas, and investors need to carefully compare the fee policies of different dealers when selecting them in order to choose the most suitable dealer for themselves.

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