Spread Cost Worked Example
Sets out how the cumulative spread cost of a trading pattern follows from its frequency, lot size, average spread and pip value in the account currency: the structural drag on the account before any consideration of strategy edge.
This page covers the calculation; it is not trading advice.
How this calculation works
Spread cost per trade = average spread (in pips) × pip value (in account currency, at the position's lot size). Outside forex, the same product is the spread in the instrument's own price units × the quantity held (contract size × lots), converted to the account currency; both inputs must use the same price step.
Spread cost per week = round-trip trades per week × cost per trade. Annualised = weekly cost × 50, on an assumed calendar of 50 active trading weeks a year.
The result is the spread cost the strategy must overcome before producing any positive return; commission and swap, where charged, are separate costs added to it. Every trade filled against the broker's quoted bid and ask pays the spread regardless of outcome, so the cost does not depend on win rate, average profit on profitable trades or directional accuracy, although exits filled in wide-spread conditions pay more.
Variable spread accounts pay the spread that prevails at the moment of trade execution. The average spread used in the calculation should reflect the actual blended average across the times the trader opens and closes positions, not the broker's published minimum during peak liquidity.
Formula
- Cost per trade = average spread × pip value
- Annual cost = round-trip trades per week × cost per trade × 50
- As percentage of starting equity = annual cost ÷ starting account equity × 100
Worked example
EUR/USD, 1 standard lot per trade, an illustrative average spread of 1.2 pips (the actual figure varies by broker, account type and market conditions), 20 round-trip trades per week, $10,000 USD account.
Pip value at 1 standard lot EUR/USD on USD account = $10.
Cost per trade = 1.2 × $10 = $12.
Cost per week = 20 × $12 = $240. Annual cost = 50 × $240 = $12,000.
As percentage of starting equity = $12,000 ÷ $10,000 = 120% of starting equity per year in spread alone.
Cutting trade frequency to 10 round trips per week halves the cost to $6,000 (60% of equity). Lowering the average spread to 0.5 pips as well (a tighter broker or a different account type) brings the annual spread cost down to $2,500 (10 × 0.5 × $10 × 50), or 25% of equity. Account types with narrower spreads often charge a per-lot commission, which this figure does not include.