Accounting for Commission in Your Calculations

Commission is the most predictable of trading costs and therefore the most galling to omit. Unlike slippage it is known in advance and exactly, so leaving it out of a calculation is not uncertainty but a straightforward error.

Converting commission into pips

Commission is usually charged on turnover: a fixed sum per lot each way. To compare it with the spread and with targets, convert it into pips using the pip value for your size. The arithmetic is then simple: total trade cost equals spread plus commission on entry plus commission on exit. That sum, not the spread alone, is what should be compared against expected profit.

Why commission-free accounts are not cheaper

The absence of a commission usually means it is built into the spread. Comparing two accounts on a single parameter is meaningless: an account with a tight spread and a commission and one with a wide spread and none can cost the same or differ several times over. The only correct comparison is total cost per trade at your typical size.

Commission in a backtest

A backtest without costs is the most common reason a strategy profitable on history turns out unprofitable in reality. This applies especially to high-frequency approaches: a system with an expectancy of a few pips and costs of a few pips looks excellent on history and works at breakeven or worse in practice. Test in both directions — first with realistic costs, then with inflated ones, to see the margin of safety.

Cost share as a metric

It is useful to track a separate figure: what share of the average winning trade is consumed by costs. If the answer exceeds a quarter, the strategy is critically dependent on broker conditions, and any deterioration in them will push it into loss. Such a system is viable only on excellent terms, and that is worth knowing in advance rather than discovering on an account.

This material is educational and is not individual investment advice. Trading forex carries the risk of losing capital.