Spreads vs. commissions: the hidden costs that determine your profitability
The debate between spread-based and commission-based pricing is one of the most fundamental yet confusing topics for new traders. It is essentially a question of how you want to pay for your broker’s services: built into the price of the trade or as a separate, explicit fee.
Understanding this distinction is crucial because these costs directly impact your bottom line. Depending on your trading style, one model can be significantly more expensive—or more profitable—than the other. This article breaks down the mechanics of spreads and commissions, provides real-world examples to show how they affect your trades, and helps you determine which pricing structure is better for you.
What are spreads and commissions in FX trading?
Before comparing, we need to clearly define these two core costs.
What is a spread in FX trading?
In financial trading, the spread is the difference between the bid price (the price a buyer is willing to pay for a currency pair) and the ask price (the price a seller is willing to accept). This difference is typically measured in pips, which is the smallest unit of price movement for a currency (usually 0.0001 for most major pairs).
Think of it like a currency exchange booth at an airport. If you see a board showing “EUR/USD” with a “We Buy” price of 1.0800 and a “We Sell” price of 1.0803, the 0.0003 difference is the spread. This is the booth’s profit for facilitating the transaction. In Forex, the spread is the broker’s primary fee on many account types.
Spreads are not always the same. They come in two main types:
- Fixed spreads: These remain constant regardless of market conditions. They offer predictability, which can be helpful for beginners, but they are often set slightly wider to protect the broker during volatile times.
- Variable (floating) spreads: These change in real-time based on market liquidity and volatility. They can be extremely tight (low cost) during calm, high-liquidity periods like the London-New York session overlap, but can widen dramatically during major news events or market turbulence.
What is a commission in FX trading?
A commission is a direct, separate fee that a broker charges for executing a trade. This fee is most commonly associated with ECN (Electronic Communication Network) accounts, which give traders direct access to interbank liquidity and raw market prices. Because the spreads on these accounts are often near zero, the broker charges a transparent, fixed fee for their service.
Commissions are typically charged in one of two ways:
- Per lot (round turn): A fixed fee per standard lot (100,000 units) traded. For example, a broker might charge $7 per lot. This fee covers both the opening and closing of the trade.
- Per side: The commission is split between opening and closing the trade. For instance, you might pay $3.50 when you open the trade and another $3.50 when you close it, also totaling $7.
Spreads vs commissions in FX trading: the key differences
To make the distinction clearer, let’s compare the two models side-by-side :
| Feature | Spread-based pricing (e.g., Standard Account) | Commission-based pricing (e.g., ECN/RAW Account) |
|---|---|---|
| How it’s charged | Built into the bid/ask price. | Charged as a separate, explicit fee. |
| Calculation | Difference between the bid and ask price (e.g., 1.2 pips). | A fixed amount (e.g., $7 per standard lot). |
| Cost transparency | Less transparent; the cost fluctuates with market volatility. | Highly transparent; you know the exact fee beforehand. |
| Typical spreads | Higher spreads (e.g., 1.0–2.0 pips on EUR/USD). | Ultra-low or “raw” spreads (e.g., 0.0–0.3 pips on EUR/USD). |
| Best for… | Beginners, swing traders, and those who trade less frequently. | Scalpers, day traders, and high-volume professionals. |
Which is better? Spreads vs commissions
The million-dollar question: which one is better? The honest answer is that it completely depends on how you trade. The “better” choice is the one that minimizes your total trading costs based on your strategy.
Let’s break it down with some practical examples, using the EUR/USD pair as our instrument. We’ll compare a typical commission-free account with a 1.2 pip spread against a raw-spread account with a 0.2 pip spread and a $7 round-turn commission per standard lot. For a standard lot (100,000 units), 1 pip is approximately worth $10.
Scenario 1: the high-frequency scalper
Imagine a scalper who makes 50 round-turn trades per day on standard lots. They hold positions for seconds or minutes, aiming to profit from tiny price movements. For them, every fraction of a pip matters.
- Spread-only cost: 1.2 pips * $10/pip * 50 trades = $600 per day.
- Commission cost: (0.2 pips * $10/pip * 50 trades) + ($7 commission * 50 trades) = $100 + $350 = $450 per day.
- Verdict: The commission-based account saves this trader $150 per day. By paying a separate commission, they gain access to the ultra-tight spreads necessary for their strategy to work.
Scenario 2: The swing trader
Now consider a swing trader who holds positions for several days and only makes 5 trades per week (20 per month). They are less concerned with the entry cost and more focused on the overall market move.
- Spread-only cost: 1.2 pips * $10/pip * 20 trades = $240 per month.
- Commission cost: (0.2 pips * $10/pip * 20 trades) + ($7 commission * 20 trades) = $40 + $140 = $180 per month.
- Verdict: The commission-based account is still cheaper in this example, but the difference is much smaller ($60). However, the swing trader must consider another crucial cost: swap rates (overnight fees). If the commission-based account has less favorable swap rates for its long-term positions, the slight saving on entry costs could be wiped out by higher holding costs. For this trader, the simplicity and predictability of a spread-only account might be more appealing.
The break-even point
As you can see, the more frequently you trade, the more valuable a low-spread, commission-based account becomes. For traders who open only a few, larger positions per month, the difference is marginal, and a commission-free account offers simplicity without a significant cost penalty.
5 broker reviews
To help you put this knowledge into practice, here are reviews of five brokers, focusing on their cost structures and how they fit different trading styles.
XM Group
XM is a giant in the industry, serving millions of traders worldwide. Its popularity stems from its low entry barrier and flexibility. With a minimum deposit of just $5, it’s one of the most accessible brokers for beginners. XM primarily uses a spread-based model, with spreads starting from a competitive 0.6 pips on standard accounts. They also offer Micro accounts, allowing traders to start with tiny position sizes, which is perfect for learning without risking much capital. The availability of both MT4 and MT5 provides a professional trading environment as you grow.
- Best for: Beginner to intermediate traders who want to start with a small deposit and prefer the simplicity of a commission-free, spread-based account.
- Pros: Extremely low minimum deposit, highly regulated (FCA, CySEC, ASIC), and offers a wide range of platforms and deposit methods, including Bitcoin.
- Cons: Spreads, while competitive, are not the absolute lowest available for high-frequency scalpers. An inactivity fee may apply.
BlackBull Markets
BlackBull Markets is a broker tailored for the serious trader. It has built a strong reputation for institutional-grade trading conditions. Their ECN accounts offer raw spreads from 0.0 pips, making it a top-tier choice for cost-sensitive traders. While they don’t advertise a minimum deposit, their power lies in execution speed and deep liquidity. They offer a massive range of over 26,000 instruments and support all the major platforms, including MT4, MT5, and cTrader. Their 24/7 customer support is a significant plus for global traders operating at all hours.
- Best for: Active day traders, scalpers, and professionals who need tight spreads, fast execution, and are comfortable with a commission-based ECN model.
- Pros: Ultra-low spreads from 0.0 pips, excellent Trustpilot rating (4.8/5), fast execution, and supports TradingView directly.
- Cons: Being headquartered in New Zealand, it may not be the first choice for traders seeking top-tier FCA or CySEC regulation, though it is regulated by the FMA in New Zealand.
AvaTrade
AvaTrade is a well-established broker known for its safety and stability, having been founded in 2006. It operates under a heavy regulatory blanket, including licenses from the Central Bank of Ireland, ASIC, and CySEC, which offers traders a high level of fund security. AvaTrade simplifies costs by offering commission-free trading on most of its assets. Their spreads are competitive, starting from 0.1 pips on certain accounts, meaning all costs are wrapped up neatly in the spread. They also provide a vast array of platforms, from MT4/MT5 to their own web trader and copy trading solutions like DupliTrade.
- Best for: Traders who prioritize regulatory safety and a commission-free structure, including swing traders and those interested in copy trading.
- Pros: Strong regulation across multiple top-tier jurisdictions, no commissions, and a huge selection of trading instruments (1250+).
- Cons: The minimum deposit is $100, which is higher than some competitors. Fixed spreads are available, but variable spreads can widen during news events.
FP Markets
FP Markets is an Australian broker that has gained a loyal following for its commitment to low-cost trading. Like BlackBull, they offer a true ECN pricing model with spreads starting from 0.0 pips. This makes them a direct competitor for the attention of scalpers and algorithmic traders. They charge a competitive commission on their RAW accounts, providing full transparency. A major advantage for FP Markets is their platform choice; in addition to the standard MT4 and MT5, they offer the highly popular cTrader platform, which is favored by many ECN traders for its intuitive interface and advanced features.
- Best for: ECN traders, cTrader enthusiasts, and those looking for some of the tightest spreads in the market.
- Pros: Raw spreads from 0.0 pips, offers cTrader alongside MT4/MT5, and is regulated by ASIC.
- Cons: The minimum deposit is $100. As an ECN broker, the raw account structure with commissions may be confusing for absolute beginners.
HF Markets
HF Markets (formerly HotForex) strikes an excellent balance between accessibility and advanced trading options. With a minimum deposit of just $5, it’s as accessible as XM, making it great for beginners. However, it also caters to professionals with a variety of account types, including Zero and Raw Spread accounts that feature tight spreads and commissions. They are also well-regulated (FCA, CySEC, DFSA) and serve millions of clients. This flexibility allows a trader to start with a simple spread-based Micro account and, as they gain experience and volume, switch to a commission-based account without changing brokers.
- Best for: Traders of all levels who want the flexibility to grow from a beginner account to a professional, low-spread account within the same broker.
- Pros: Very low minimum deposit ($5), high maximum leverage (1:1000), and multiple account types to suit different strategies.
- Cons: The vast range of bonuses and promotions, while attractive, can sometimes come with complex terms and conditions that require careful reading.
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