Intraday stock trading vs FOREX: Commission Comparison

Trading online the foreign exchange is a lot cheaper than intraday stock trading regarding commission. FOREX brokers apply spreads to the currency pair exchange prices while stock brokers apply commission on each trading order. However if you do the math, it is much more profitable to be trading FOREX than stocks intraday. Add the fact your forex account is allowed 1:100 leverage and you can fund your account with credit cards or Paypal, and I guess we have a winner. Anyone disagree?

I have always tried to find the most profitable way to make money in online gambling while paying minimum commissions. I have been trading sports in Betfair for a couple of years in the past where commission is applied in the end of each event separately without taking into account the number of a trader's orders. Nowadays I've started trading the Greek stock market and the foreign exchange with some success I must say. However, for years I wanted to make a commission comparison between stock trading and FOREX trading and that day has finally come. I fired up an Excel spreadsheet, did basic math and came to my conclusions.

The commission charged in stock trading in Greece is 0.375% when buying and 0.525% when selling, making it a total of 0.90%. The commission charged in FOREX market is zero according to FOREX brokers. Sure, they don't want to make any profit! The truth is they have spreads in the currency pair's prices. For instance, EUR/USD is trading at 1.3400/1.3402. That means you can buy at 1.3402 and you can sell at 1.3400. Obviously a simultaneous buy and sell will cost you 2 pips, the difference between the 2 quoted prices. That is how a FOREX broker makes money. How can we compare those spreads with stock trading commission? Things are a lot easier than what I thought.

Let's say I buy a greek stock with 10,000$ and the stock rises 5%. I sell and I have made 500$. Stock market brokers will charge me 0.9% of 10,000$, which results to 90$. So I have made 410$ net of commission. Moving on to FOREX, I once again have 10,000$ and I buy EUR/USD at 1,3400/1.3402. If EUR/USD moves up, I'd sell at 1.3900/1.3902. Although that is a very big move for a currency pair, for example's sake we will accept it. So, I've made 500 pips which means 500$. The FOREX broker will charge me 2 pips spread, that is 2$. Impressive huh? Well, not so.

A FOREX trader's goals are a lot lower. He is looking to be making a couple of tens of pips. Apart from that his forex account is almost always on leverage. That is trading with a lot more money than his account's balance. This is because the currency pairs can't lose their entire value. Additionally FOREX brokers will automatically close your trading positions when you've lost 100 pips to protect you and themselves.

So let's say a FOREX trader has 200$ in his account and trades with 1:50 leverage. That means that each pip costs 1$. If he makes 10 pips profit, he has earned himself 10$. He just made 5% of his money just the same as l would have done in the example above. Since the spread is 2 pips, he has paid $2 to the broker for his trading transaction. About the same percentage of commission as mine (1%). Now if he has $1000 in his account applying leverage of 1:100, one pip would be equal to 10$. If he is to win 5pips per trade, he would increase his bankroll by 5%. However that would cost him 20$ in spread commission!

Now compare that to a forex account on a 1:10 leverage. Having $1000 available and trading forex with leverage 1:10, a pip would be equal to 1$ as we said above. For 5% increase of his balance, the trader needs to win 50 pips but the spread will only cost him 2$. That is 0.2% commission on his capital instead of 0.9% in case of stock trading.

So, the less leverage of a forex trading account, the less "commission" the forex trader will be charged in terms of percentage. On the other hand he needs to predict a currency pair movement of a lot more pips for the same profit. Let's summarize:

If we have 10,000$ available and want to be making 500$ in each trade then:

Trading - FOREX Trading