Costs: Spread, Commission, Swap and Slippage

Second Officer · SO03: Money Maths: Profit, Size and Margin · About 25 minutes

Safety rule: Measure net results from executed prices and itemised charges, not idealised chart candles.

Your mission today

By the end you can reconcile the actual trading costs of a completed demo deal without double-counting spread.

Before you start

Your SO03.1 trade ledger and a sample broker fee schedule. All prices and account balances below are imaginary teaching figures, not actual market data.

1. Understand the problem

The price on the shelf is not the whole bill

A restaurant meal can cost more after service charges. Trading also has more than one possible cost. Spread is the difference between Bid and Ask. Commission is a separately charged fee. Swap or financing may apply for holding a leveraged position through certain rollover times. Slippage is the difference between an intended price and actual execution.

A cost is not automatically charged in every product or account. Always identify how your actual broker records it. Some charges appear in deal history, while others require account or contract disclosures.

2. Worked example: show the loss first

Imagine a completed fictional trade that earns +$12.00 gross when calculated from its actual executed opening and closing prices.

The trade has a separate $1.20 commission and $0.30 overnight financing debit. Net result: $12.00 − $1.20 − $0.30 = +$10.50.

To study the loss first, imagine instead that the price result was −$12.00 under the same charges. Net is −$13.50. That negative case is the outcome you must make affordable when planning.

The entry and exit fills already reflect the relevant executable Bid and Ask. Do not subtract a second estimated spread amount from that fill-based P/L. For a midpoint-based backtest, however, execution friction may need to be modelled explicitly.

Original Black Box Journey diagram. Imaginary training figures; not a real historical trade.

3. Apply the idea

Spread changes with the quote

If a conventional EURUSD quote is Bid 1.1000 and Ask 1.1002, spread is 0.0002, or two pips. A long opened at Ask and closed immediately at unchanged Bid starts two pips negative before separate commission.

That example does not establish the spread in tomorrow's market. During thin liquidity, market openings, or some scheduled announcements, spreads can widen. A screenshot of one tight quote cannot prove a consistent cost structure.

4. Test the limitations

Financing and conversion depend on the product

A leveraged position held overnight may incur a financing charge or credit. Broker schedules vary. Some markets have triple-rollover conventions, other products have different settlement mechanics, and rates can change.

Your account currency may differ from the profit currency. A platform may convert a result at its applicable rate and charge additional conversion costs. Keep rate, time, currency and fee separate. Never assume all instruments use EURUSD's $10-per-pip standard-lot example.

5. Record a defensible decision

Build a cost-aware test

A strategy backtest that uses midpoint candles without spread or commission can show a very different result from a real account. Write the assumption on the test before looking at profit.

For each demo trade, reconcile opening and closing fills, separately posted commission, financing, conversion and net total. If your test includes an explicit spread estimate, verify that the fill prices do not already include the same cost. Compare alternative realistic assumptions without adjusting them to make a strategy look profitable.

6. Reconcile price cost without charging the spread twice

Synthetic EURUSD quote: Bid 1.08000, Ask 1.08020. A buy opened at Ask and immediately closed at unchanged Bid has a 2-pip price loss. At an invented $1 per pip, that is −$2. Add an illustrative $0.80 round-trip commission and net result becomes −$2.80. If a separate overnight charge of $0.50 applies, net becomes −$3.30. These are separate invented charges; real broker schedules differ.

The entry and exit quotes already include the quoted spread. Do not subtract another $2 merely because the report has a column labelled spread. That would double-count it. Conversely, a midpoint-only backtest that used 1.08010 for both entry and exit has not included the executable bid/ask cost.

Practice record: Make two columns, GROSS PRICE RESULT and OTHER CHARGES. Reconcile three imaginary trades with explicit Bid, Ask, size, commission and financing. Record the broker specification and date for each real demo example.

Common mistake

Subtracting the spread twice makes a real trade look worse; ignoring it in midpoint-only backtesting makes a strategy look better. Both errors distort the result. Use a consistent accounting method and label each cost once.

Plain-English glossary

• Spread: Ask minus Bid at a quoted moment.
• Commission: A separately charged execution fee.
• Swap: Overnight financing under certain contracts.
• Slippage: Difference between intended and executed price.
• Gross result: Price P/L before separately recorded charges.
• Net result: P/L after the applicable charges.

Try it yourself

Build an itemised ledger for five imaginary trades and five actual demo fills. Recompute net P/L independently. Include one overnight hold, one loss, one currency conversion and a case where spread is already embedded in fills. Write down exactly why it must not be subtracted twice. Keep the original inputs and your final result together in your student journal.

What you can now do

• Explain spread, commission, financing and slippage.
• Reconcile net P/L without double-counting.
• Document cost assumptions before assessing a strategy.

Next lesson

SO03.5 · Losing Streaks and Total Exposure. Read it after completing the worksheet above, not just after reading the headings.