Spread and commission: the hidden tax on small R scalps

[Shadow Trader]

A scalper aiming for ten pips with a five pip stop might look at a one to two reward to risk and feel comfortable. But if the spread is one pip and commission adds another half pip round trip, the real cost is a meaningful part of the profit. A winning trade nets eight and a half pips, while a losing trade costs six and a half. That changes the break even win rate considerably, from thirty three percent to about forty three percent. Many strategies that look profitable in a gross backtest are actually losing money once costs are included. When testing a setup, always include the actual spread of your broker at the time of day you trade, and add commission. Remember that spreads widen during news and rollover, so costs are not constant. If the target is small relative to costs, consider either increasing the target by trading higher timeframes or avoiding that pair at certain times. The cheapest improvement to many strategies is simply trading fewer, larger moves rather than many small ones.

[FXS HongKong Scalper]

For scalpers, trading only during the tightest spread hours makes a big difference. On EURUSD that is usually the London session. In Asia, USDJPY and AUDUSD often have tighter spreads than the European pairs, which helps reduce the cost burden for small targets.