Have you ever worked for a prop trading company? Well, if you have, then you are aware that there are often countless arguments regarding whether it is better to have either a low spread or low commissions. However, here comes the question – what actually matters when trading in funding accounts?
Well, the truth is that spread and commissions may both influence your profit and losses, but in different ways than you think of it. Moreover, while passing the test or remaining profitable, it might be even more important to be aware of their relation to each other.
Let’s try to clarify the situation, shall we?
First, Let’s Clarify The Term of Spread
Most people don’t even know What is a spread in trading. Spread is the difference between the price at which you can sell an asset and purchase it. It is kind of a hidden fee included in every trade. That is to say, it is neither charged explicitly nor is visible immediately.
However, in regards to the question of spread definition in trading, it should be said that once your trade opens up, you become a loser anyway.
It turns out that it becomes even more important in prop trading due to certain risks involved.
Now, What About Commission?
Commission is much simpler to understand. It is a fixed fee that is levied by either your broker or your prop company for each trade made, typically on a per-lot basis. While spread varies, commission does not. You can easily trace it in your trading records.
While commission may appear as the more formidable foe from first sight due to its visibility, there is one catch – you sometimes end up getting better trading terms despite paying commission.
How so?
Because commission-based accounts typically have narrower spreads.
The Real Difference Comes Down to Trading Style
This is where it gets exciting! The thing is, which one, whether spread or commission, will affect you more largely depends on your trading style.
For example, if you are a scalper who frequently closes their trades after just a few minutes, spread becomes the main focus. Just 1-2 pips could make an effective strategy lose its efficiency.
However, if you are a swing trader and hold your positions throughout hours or even days, then commission becomes more important. In this situation, a couple of pips doesn’t matter much, while the fees you pay over and over again become significant.
So, it all depends on the context!
Why Prop Traders Need to Care More Than Retail Traders
Something that is overlooked by many people is the fact that costs become much more noticeable in the prop firm setting.
In a personal trade account, there isn’t as much to be concerned with regarding costs as they will have little impact on your results. However, when dealing with a Prop Firm Account, there is much less margin for error. Not only is there a limit on losses and profit expectations but there are also drawdown guidelines to adhere to.
If, for example, the strategy you employ yields an average of 10 pips per transaction but instead of having a spread of one pip, you have two, then you are losing 10% of your earnings instantly.
Tight Spread + Commission vs Wide Spread + No Commission
Here you will generally encounter two systems:
1. Small spreads + commission
Smaller spreads (close to zero in case of major currency pairs)
Fixed commission per trade
More appropriate when trying to enter or exit at certain levels
2. Large spreads – no commission
Zero fee charged
Large spread covers all costs
Easier to use but may cost more than the first one
It seems like a simpler system where there is no commission charged or calculated, and it seems to be cheaper. In fact, it often ends up being a much more costly choice.
The Hidden Impact on Strategy Performance
And here comes something more practical.
Though your strategy looks good on paper, it might not be able to withstand reality.
Namely:
A breakout strategy will be affected by widened spreads in times of volatility.
A scalping system might run into trouble with both slippage and commissions.
A high-frequency strategy might get eliminated due to accumulating commissions.
Therefore, you should consider not only your win rate and risk/reward ratio. But above all, you need to take into account what remains when you take into account the costs associated with the spreads and commissions.
Market Spreads and Market Conditions are Very Important
But still, there is one thing that is usually forgotten. Namely, the spreads themselves vary according to the market conditions.
In case some significant news comes out, or liquidity is poor during your trading hours, then you will see that your spreads are likely to widen. Despite your broker saying “tight spreads”, your spreads will probably not remain tight.
To that, add slippage – inability to get the expected price of your order. You will be facing a very difficult situation.
That is why proprietary traders prefer stable performance of their strategies over anything else.
So, What Should You Focus On?
Not “which one will give me the lowest cost—spread or commission?” But “how can I combine the two so that my trading cost becomes the lowest?”
And here’s how you can figure it out easily:
- Trade often → go for low spreads
- Hold long → pay attention to commissions
Don’t know which one? Calculate total cost per trade
Very rarely will professional traders opt for one over another.
An Important Tip That Few Traders Apply
The next time when choosing a prop firm or a specific account, just do this little experiment:
Take demo/trial version and calculate:
- Average spread during your trading session
- Commission per trade
- Total cost for 20-30 trades
This will show you an objective picture, not what marketing people say.
As you understand, it doesn’t matter whether it sounds more costly or less.