Every trade opens slightly in the red. You buy at a higher price than you could sell at, and commission is charged on top, so the price has to move your way before you break even. Working out that cost in dollars before you trade tells you how far the market must move just to pay for it.
What you will learn
- How the bid, the ask and the spread work
- The four costs on a CMC Funded trade: spread, commission, markup and holding costs
- How to add up what a trade costs, in dollars and in pips
- Why costs count towards your daily loss limit
What is the spread?
Every price has two sides. The bid is the price you can sell at and the ask is the price you can buy at. The spread is the gap between them, and you pay it on every round trip, meaning the open and the close together.
Say EUR/USD shows a bid of 1.10000 and an ask of 1.10012. The spread is 0.00012, or 1.2 pips. You buy one standard lot at 1.10012, but if you closed it straight away you would sell at 1.10000, a loss of 1.2 pips × $10 = $12. That $12 is the cost of the spread, and it shows as an open loss from the moment you enter.
A short trade works the other way round: you sell at the bid and buy back at the ask. A narrower spread costs less, so the same trade is cheaper on a pair quoted 0.8 pips wide than on one quoted 2 pips wide.
When do spreads widen?
In most markets spreads are narrow when many traders are active and wider when few are. They tend to widen around major news releases, around the daily rollover when activity thins, and outside a market's main trading hours. A trade that costs $12 in a busy session can cost several times that at a quiet hour. The lesson on trading sessions shows when each market is busiest.
How do commission and markup work?
Simulated trades carry trading costs, as they would on a live account: a commission when a trade opens and when it closes, a price markup on some symbols, and holding costs on positions kept overnight.
Commission is taken once when the trade opens and once when it closes. On CMC Funded it is $25 for every $1 million of position value each way, on every symbol, so one standard lot of EUR/USD at 1.1700, worth $117,000, pays about $2.93 each way. The examples below round that to $3 per lot each way. At that figure a round trip on one standard lot costs $6, the same as 0.6 pips on EUR/USD.
A markup is an amount added to the market price on some symbols. It is built into the bid and the ask, so the spread you are quoted is wider than it would be without it, and you will not see it listed as a charge.
What are holding costs?
A holding cost, also called a swap or overnight financing, is charged on a position you keep open past the daily rollover. For a currency pair it reflects the gap between the two currencies' interest rates, and for other markets it is a financing rate on the position's value. The rate differs by symbol and by direction, so a long and a short on the same pair can cost different amounts.
Holding overnight and over the weekend is allowed on CMC Funded, and holding costs apply. On CMC Funded the rate is set for each symbol and each direction, and on some positions it is a credit rather than a charge. Forex, metal and index positions held over the weekend are charged three nights at once, at the Friday rollover, so check the symbol details before you hold a trade through it.
As a sample, 2 lots held for 3 nights at $6 per lot per night cost 2 × 3 × $6 = $36.
How much does one trade cost?
Add the costs up before you place the trade, then turn the total into pips so you can compare it with your target. Take 2 lots of EUR/USD with a 1.2-pip spread and commission rounded to $3 per lot each way, opened and closed on the same day.
- One pip on 2 lots is worth 2 × $10 = $20.
- The spread costs 1.2 pips × $20 = $24.
- Commission costs $3 × 2 lots × 2 (open and close) = $12.
- The total is $24 + $12 = $36, which is $36 ÷ $20 = 1.8 pips.
The trade has to move 1.8 pips your way to break even. With a 10-pip target, worth $200, costs take $36 of it, close to a fifth. A trade aiming for 3 pips would keep only 1.2 of them. You can check sums like these with the profit calculator.
Why do costs count towards your daily loss limit?
The daily loss limit on CMC Funded is measured on equity, and every cost lowers equity. Commission and holding costs come off the balance. The spread shows as an open loss the moment you enter, and it becomes a closed loss if the price has not moved by the time you exit.
On a $10,000 Classic account the daily limit is $500. Ten trades like the one above cost 10 × $36 = $360 before the price moves at all, which is 72% of the day's limit. On a $10,000 Direct account the limit is $400, and the same ten trades use 90% of it. A busy day of small trades can reach the limit even when no single trade went badly. The daily loss and maximum loss lesson and the rules page explain the limits in full.
Check your understanding
GBP/USD shows a bid of 1.26450 and an ask of 1.26470. What is the spread, and what does it cost on 0.50 lots?
The spread is 0.00020, or 2.0 pips. One pip on 0.50 lots is $5, so the spread costs 2.0 × $5 = $10.
A trader opens and closes eight trades of 2 lots of EUR/USD in a day while the quoted prices stay unchanged, and is down $288. Where did the money go?
Into costs. Using the example above, each trade paid $24 of spread and $12 of commission, and 8 × $36 = $288. Every dollar of cost lowered equity, which is what the daily loss limit measures.
Why can the same trade cost more at a quiet hour than in a busy session?
Spreads widen when few traders are active. The gap between bid and ask is larger, so every round trip costs more.
Key points
- You buy at the ask and sell at the bid. The gap between them, the spread, is paid on every round trip.
- Commission is charged when a trade opens and when it closes, and some symbols carry a markup inside the price.
- Positions kept overnight pay holding costs, which differ by symbol and by direction.
- Turn the total cost into pips so you can compare it with your target.
- Costs lower equity, so they count towards the daily loss limit.
Next lesson: Order types: how to get into and out of a trade
All trading is simulated. Rewards are based on performance and are not guaranteed.