The three costs: spread, commission, swap

The spread is the gap between the price at which you can buy and the price at which you can sell. On a USD/ZAR quote of 18.4100, you might see a buy price of 18.4115 and a sell price of 18.4085. The difference is 0.0030 rand, which is 30 points. A point here is the fourth decimal place, so 0.0001 is one point.

Your platform shows the spread in points, but your account is charged in rand. To turn points into rand you multiply by the value of one point for the size you are trading. For 1 lot of USD/ZAR, one point is worth about R1.00 at this price. So a 30 point spread costs roughly R30 the moment you open the trade, before the market has moved at all.

That R30 is not a fee taken from your balance as a separate line. It is built into the price. If you buy at 18.4115 and sell immediately at 18.4085, you lose the spread. The market must move in your favour by 30 points just for you to be back where you started. Spreads widen when major news is released and narrow when trading is quiet, and the figure you see before you click is the one that applies.

Commission is a separate charge on some account types, usually the ones that advertise a tighter spread. It is quoted per side, which means you pay it once when you open and again when you close. If the commission is R7 per side on 1 lot, a completed trade costs R14 in commission. On other account types the commission is zero and the spread is wider, so the cost is still there, just collected differently.

Swap is the charge for holding a position overnight. It exists because a forex trade involves borrowing one currency to buy another, and the two currencies carry different interest rates. The broker passes that difference on, adjusted by a small mark-up. Swap is quoted per night per lot and can be positive or negative depending on which direction you trade and which pair you hold.

Swap is credited or debited at a set time each day, usually when the New York session closes. Most brokers apply a triple charge on one weekday to cover the weekend, so a position held across that day costs three nights at once. The exact amount varies between brokers and changes as interest rates change, so the only reliable figure is the one in the contract specifications for the instrument you are trading.

The three costs are known before you trade, which means you can total them in advance. Take the spread in rand, add the commission for both sides, then add the swap multiplied by the number of nights you expect to hold. The result is the amount the market must move in your favour before the trade breaks even. That break-even distance is the number worth writing down.

Suppose the spread is R30, commission is R14 round turn, and you plan to hold for four nights at R5 per night. The total is R30 plus R14 plus R20, which is R64. On 1 lot USD/ZAR, a move of 64 points is needed just to cover costs. If your reason for the trade only supports a 40 point move, the arithmetic says the trade is not worth taking, whatever the chart looks like.

Costs scale with size. Two lots double every rand figure above, and the required move in points stays the same. That is why the comparison is always between the cost in rand and the size of the move you expect, not between the cost and your account balance. A cost that looks small next to your balance can still be large next to the move you are forecasting.