forex-scalping.com

Fixed 1.5 pip spread or raw 0.3 plus $6 commission: how many spike trades flip the answer

Which account is cheaper, a fixed 1.5 pip spread with no commission, or a raw account averaging 0.3 pips plus $6 a lot round turn? The answer depends on how many of your trades sit in a news spike.

Work in pips. $6 a lot round turn on EURUSD is 0.6 pips, so the raw account costs about 0.9 pips in calm conditions. Say the spread widens to 4.0 pips for a minute around a release, which makes 4.6 all in. The fixed account stays at 1.5.

Trade 0.5 lot, so a pip is $5. Fixed costs $7.50 a trade. Raw costs $4.50 when calm and $23.00 in the spike.

The raw account saves $3.00 on a calm trade and loses $15.50 on a spike trade. Break-even is 3.00 divided by 18.50, which is 16%. If more than about one trade in six is traded while spreads are blown out, the fixed account is cheaper on cost alone. For someone who is flat before news, raw wins comfortably.

Illustrative numbers, so use your own broker's average and news time spreads. Fixed spread terms usually let the broker widen the quote in extreme conditions anyway, so read that clause before trusting the 1.5.

The break even count of spike trades is the useful number here. For most scalpers who avoid news, the raw account wins easily. The case for a fixed spread is mainly for traders who deliberately trade the first minute after releases. One thing to check though: some fixed spread accounts are not truly fixed during news, and the broker may widen them or reject orders. Reading the terms for when the fixed spread applies is worth doing.

Put it on a weekly count. Thirty trades a week at 0.5 lot. If 26 are calm and 4 hit a spike, the raw account saves 26 times $3.00, which is $78, and gives back 4 times $15.50, which is $62. Net +$16 for raw. Make it 24 calm and 6 spike and it is $72 saved against $93 given back, so raw is $21 behind. The flip point sits around five spike trades in thirty. That is a count you can get from your own history: pull the week's fills, mark the ones within five minutes of a scheduled release, and see which side of five you are on. The result tells you more than either broker's marketing page.

A cheap way to test a fixed spread claim is to trade it at minimum size. At 0.01 lot a pip is $0.10, so the 1.5 pip fixed spread costs $0.15 a trade and ten test trades cost $1.50. Place a few of them in the minute after a major release and a few in a quiet hour, and write down the price you clicked, the fill price, and the spread shown at the time. Do it around two or three different events, not one, because a single release can be unusually calm or unusually wild. If the fills in the spike look like the quiet hour, the fixed spread is doing its job. If they do not, you have your answer for the price of a coffee.

A fixed quote has to come from somewhere. If the market spread is 4.0 pips and the broker quotes you 1.5, the broker is carrying the difference, and nobody does that for long. So the terms usually leave room: the spread can widen in exceptional conditions, orders can be requoted, or fills can come with slippage. That means the fixed account's advantage tends to show up most in calm hours, which is exactly when the raw account is cheaper anyway, 0.9 pips against 1.5. The spike hours are where the fixed spread is supposed to help, and also where it is least likely to be honoured as stated. None of that makes fixed accounts bad, just less of a bargain than the headline number suggests.

Look at what a spread does to a short stop. Take a 5 pip stop and a 5 pip target, so 1:1. Break-even win rate is (5 plus cost) divided by 10. With the fixed 1.5 pips that is 65%. With the raw account in calm conditions, 0.9 pips, it is 59%. In a 4.6 pip spike it is 96%, which no setup reaches. If your setup wins 60%, the fixed account loses 0.5 pip a trade (+1.0 gross minus 1.5), while the raw one makes 0.1 pip (+1.0 minus 0.9). Same entries, opposite sign. The smaller the stop, the more the spread is the strategy, so tight-stop traders should convert the account's cost to pips before comparing anything else.