Let's say I'm using a retail FX broker and I pay 6 pips spread round trip and experience 1 pip slippage round trip. So 7 pips total for one completed trade. Does that mean that my average trade should be +7 pips just to breakeven?
I have absolutely no experience with FX. However, logically, yes, you would need to make more than the transaction costs of any product in order to trade it profitably. Second thought is that if you are worried about cutting it too close, you might want to find a better product to trade or re-evaluate your strategy.
Maybe I'm doing it wrong. Let's say the spread is 3 pips. So I counted it twice for both legs of the trade: in and out. So 6 pips. How do you do it correctly? If we always use bid to sell and ask to buy then we don't need to account for spread I think, only for slippage. So it depends on what data points we're using for entries and exits?
This is incorrect. If the spread is 3 pips, then the bid and the ask are each 1.5 pips distant from the "middle price" you see on your chart (unless you've deliberately configured it differently, which is possible with some spot forex brokers). That means you're effectively losing 1.5 pips (compared with the mid-price) when you open a position and another 1.5 pips (compared with the mid-price) when you close it, or a total of 3 pips in spread on the round-trip, not on each individual opening/closing transaction. The above explanation excludes requotes and assumes that the spread remains constant for the duration of your trade. There's no such thing as "slippage", per se, when you're dealing with (actually "against") a retail forex broker, as no currencies are actually changing hands and no trade is being executed in an underlying market: you're just having a side-bet with your "broker", who is actually your counterparty. "Slippage", strictly speaking, applies only to genuine brokerage situations in which your broker is executing trades on your behalf in a market to which you don't yourself have access (e.g. in this instance it would be the interbank market) but that isn't typically the case, at all, with retail forex "brokers". And the fact that you're asking about "spreads" rather than "commissions" illustrates that it isn't the case for you. The key concept is that they're not really "brokers" at all: they just call themselves that, quite legally, to make it appear to the uninitiated that they're trading "on your behalf" while in actuality you're simply betting against them.
That's another loophole in the system. At best, in any regulated market, they should be called 'providers' and should also have to disclose that being classified as a 'provider' they're a counter-party market-maker that makes money when you lose money. They dress themselves up as being institutional, i.e. part of the financial industry framework and use their disclosure of being regulated as marketing material. Disgusting individuals.
They certainly shouldn't be allowed to call themselves "brokers" when they're not, anyway. The reality is of course more complicated than the slightly simplified distinction I set out above, and isn't helped by the fact that different countries have different laws and regulatory policies, either. But undoubtedly the typical neophyte spot forex trader is seriously misled by the "brokers" targeting him.
Got it. 1. So at Oanda the price they chart by default is the midpoint price meaning (bid+ask)/2 ? 2. I understand that technically there can not be "slippage" by standard definition as retail fx brokers are just bucket shops trading against without passing your trades to the "real forex market". But couldn't the price move between the time you tried to hit the ask with a market buy order and the time they fill it? Couldn't the ask go up in that interval of time and couldn't they fill your market order at that higher ask? Doesn't this happen somewhat often and wouldn't 1 pip be a good estimate for that transaction cost?
I agree they should not be called brokers. But market makers have always taken the other side. I don't see it as necessarily immoral. It's even happened in stocks. Some retail shop would feed their order flow to their sister market maker like Knight or whatever. A case could be made that even some trading desks on the real Interbank FX are bucket shops - except their clients are institutions. Let's say Deutsche Bank has a market maker type desk and fills orders from hedge funds - obviously DB is trading against them.
@pursuit If you are interested in trading, instead of focusing on how to turn 100 into 200, why don't you learn to actually trade?