How spreads, commissions, and swaps work in trading

If you ask most new traders why their strategy isn’t profitable, you’ll usually hear the same answers: bad entries, emotional mistakes, or poor risk management. What often gets overlooked is something far less exciting but just as important: trading costs.

Spreads, commissions, and swaps quietly shape every trade you place. They determine how much your trade costs before it even has a chance to make money. For prop traders, where profit targets are fixed and drawdowns are strictly monitored, misunderstanding these costs can be the difference between passing a challenge and failing one.

This article explains spreads, commissions, and swap fees in clear, practical terms. We’ll look at how each cost works, how they differ across markets and brokers, and why professional traders factor them into every decision they make.

What Are Trading Costs?

Every trade has a cost. Even when a broker advertises “zero commission” or “raw spreads,” the cost is simply structured differently.

Trading costs typically fall into three categories:

• Spread – the difference between the buying and selling price
• Commission – a fixed or variable fee charged per trade
• Swap (overnight fee) – the cost of holding a position overnight

Some strategies are highly sensitive to these costs, while others barely notice them. Scalpers and high-frequency traders feel every fraction of a pip. Swing traders may only care about swaps once positions stay open for days or weeks.

Understanding how these costs work is not about avoiding them it’s about pricing them into your strategy.

Spread Explained: The Hidden Cost of Every Trade

What Is a Spread?

The spread is the difference between the bid price (where you sell) and the ask price (where you buy).

If EUR/USD is quoted as:

• Bid: 1.1050
• Ask: 1.1052

The spread is 2 pips.

The moment you enter a trade, you start at a loss equal to the spread. The market must move in your favor by at least that amount before your position becomes profitable.

Fixed vs Variable Spreads

Not all spreads behave the same way.

Fixed spreads stay constant regardless of market conditions. They’re predictable, which appeals to beginners, but they’re often wider to compensate brokers for risk during volatile periods.

Variable (floating) spreads change based on liquidity and volatility. During calm market hours, they can be extremely tight. Around major news releases, they can widen dramatically.

Most prop trading firms and professional brokers use variable spreads, as they reflect real market conditions more accurately.

Why Spreads Widen

Spreads don’t widen randomly. Common reasons include:

• Low liquidity (Asian session, holidays)
• High volatility (news releases, market opens)
• Exotic or less-traded instruments

For prop traders, spread widening matters because stop-losses can be triggered even if price never actually trades at that level on a chart.

How Spreads Affect Different Strategies

Spreads have the biggest impact on short-term strategies.

A scalper targeting 5–10 pips per trade cannot afford a 2–3 pip spread. A swing trader targeting 300 pips barely notices it.

This is why professional traders match their strategy to the cost structure of the account, not the other way around.

Commission Explained: Paying for Market Access

What Is a Commission in Trading?

A commission is a direct fee charged by the broker or prop firm for executing trades. It’s usually calculated:

• Per lot
• Per side (open and close separately)
• As a round-turn (open + close combined)

For example, a $6 round-turn commission means you pay $3 to open and $3 to close a standard lot.

Commission vs Spread: What’s the Difference?

Some accounts charge:

• Wide spreads with no commission
• Tight spreads with a commission

From a cost perspective, both can be similar.

A 1.5-pip spread with no commission may cost the same as a 0.1-pip spread plus commission. The difference is transparency. Commissions make costs explicit, while spreads hide them inside pricing.

Professional traders often prefer raw spread + commission models because they offer clearer pricing and better execution during volatile markets.

Commission in Prop Trading

In prop trading, commissions are especially important because:

• Profit targets are fixed
• Maximum drawdown is limited
• Every cost reduces net performance

A trader who ignores commissions may technically hit the profit target but fail after costs are deducted.

This is why experienced prop traders track net P&L, not just gross trade results.

Markets Where Commission Is Common

Commissions are most common in:

• Forex ECN accounts
• Futures trading
• Stocks and options

CFD brokers often embed costs into spreads, while futures exchanges typically charge transparent per-contract fees.

Swap (Overnight Fee) Explained

What Is a Swap?

A swap is an overnight financing fee charged for holding a leveraged position past the broker’s daily cutoff time.

In forex, swaps are based on the interest rate differential between the two currencies in a pair. In CFDs, swaps are more closely tied to financing costs and broker policies.

Swaps can be positive or negative, depending on the instrument and position direction.

Why Swaps Exist

When you trade on margin, you’re essentially borrowing money. The swap reflects the cost—or benefit—of that borrowing.

Even though retail traders don’t physically exchange currencies, the pricing still reflects real-world interest rates and funding costs.

Triple Swap Explained

Once per week (usually Wednesday), brokers charge or credit a triple swap to account for weekend rollover.

New traders are often surprised by this charge, especially if they hold positions over long periods without factoring it into their strategy.

Swap-Free Accounts: Are They Really Free?

Some brokers and prop firms offer swap-free or Islamic accounts. While swaps are removed, the cost is often replaced by:

• Wider spreads
• Higher commissions
• Administrative fees after a certain holding period

There is no such thing as cost-free leverage. The structure just changes.

How Trading Costs Affect Profitability

Small Costs, Big Impact

A difference of 0.5 pips may sound insignificant, but over hundreds of trades, it adds up quickly.

For example, a trader placing 300 trades per month with an average cost difference of 0.5 pips is effectively giving away 150 pips monthly before considering mistakes or slippage.

This is why professionals obsess over execution quality.

Cost Sensitivity by Strategy

Different strategies tolerate costs differently:

• Scalping: extremely sensitive
• Day trading: moderately sensitive
• Swing trading: sensitive to swaps
• Position trading: less sensitive to spreads, more to financing

Good traders don’t just ask, “Is this strategy profitable?”
They ask, “Is this strategy profitable after costs?”

Spreads, Commissions & Swap in Prop Trading

Why Costs Matter More in Prop Firms

Prop trading environments magnify costs because:

• Drawdowns are strict
• Targets are fixed
• Risk limits are non-negotiable

A strategy that works on a personal account may fail a prop challenge simply due to cost differences.

What to Check Before Trading

Before starting a prop challenge, experienced traders review:

• Average spreads during active sessions
• Commission per lot
• Swap rates for preferred instruments

They adjust position sizing, trade frequency, or holding periods accordingly.

This preparation is often what separates funded traders from those who keep retrying challenges.

How Professional Traders Manage Trading Costs

Professional traders don’t try to eliminate costs they control them.

They trade during high-liquidity sessions to minimize spreads. Then They avoid holding positions unnecessarily over rollover. They size trades efficiently so commissions remain proportional to expected returns.

Most importantly, they choose strategies that naturally align with the cost structure of their trading environment.

Costs are treated as a business expense, not an inconvenience.

Common Myths About Trading Costs

One common myth is that “low spread” automatically means “cheap trading.” In reality, commissions, slippage, and swaps often matter more.

Another misconception is that swaps only affect long-term traders. Even day traders can be hit with swap charges if trades remain open past rollover.

The biggest myth of all is that costs don’t matter if your win rate is high. In reality, costs reduce both winning and losing trades quietly compressing your edge.

Key Takeaways

• Spreads, commissions, and swaps are unavoidable parts of trading
• Spreads impact every trade; commissions affect frequency; swaps affect holding time
• Short-term strategies are most sensitive to spreads and commissions
• Swing and position traders must account for swap fees
• In prop trading, ignoring costs can lead to challenge failure even with good trading decisions
• Professional traders design strategies around cost structures, not against them

FAQ

What is the difference between spread and commission?
The spread is the price difference between buying and selling, while commission is a direct fee charged by the broker. Some accounts charge one, others both.

Are swap fees charged every night?
Yes, if a position is held past the broker’s rollover time. Once per week, a triple swap is applied to account for weekends.

Which trading style is most affected by spreads?
Scalping and high-frequency trading are most affected because profit targets are small and trade frequency is high.

Do prop firms charge swaps and commissions?
Most prop firms pass through real trading costs, including spreads, commissions, and swaps, even in simulated environments.

Can swap fees be positive?
Yes. In some cases, holding a position can earn a positive swap, though this is less common in modern markets.