Definition
Effective trading cost is the true cost of executing a trade, combining all explicit and implicit costs: the bid-ask spread, per-lot commissions, and any systematic slippage. This metric normalizes different pricing models to enable fair comparison between brokers.
A broker advertising "0.0 pip spread" with a $7/lot commission is not necessarily cheaper than one offering 0.8 pip spread with no commission. Only the effective cost calculation reveals the truth.
Formulas
Effective Cost = Average Spread + (Commission per Lot / Pip Value)Converts the per-lot commission into pip-equivalent, then adds to the average spread for a unified cost measure.
Effective Cost = Average SpreadFor spread-only accounts, the effective cost equals the average spread since all costs are embedded in the spread markup.
Annual Cost = Effective Cost (pips) x Pip Value x Lots/Day x 252Estimate yearly trading cost impact based on daily volume. 252 = standard trading days per year.
Account Models
Spread-Only (Standard)
- All costs embedded in wider spread
- Typically 1.0 -- 2.0 pips on EUR/USD
- Simpler to understand for beginners
- Broker markup is opaque
Raw Spread + Commission (ECN)
- Near-zero spreads from LP feed
- Explicit commission per lot ($3-7 per side)
- Lower effective cost for active traders
- Transparent pricing structure
Benchmark Ranges
Effective cost benchmarks for EUR/USD (most liquid pair):
| Rating | Range | Assessment |
|---|---|---|
| 0.4 - 0.7 pip | 0.4 -- 0.7 pip effective | excellent |
| 0.7 - 1.0 pip | 0.7 -- 1.0 pip effective | good |
| 1.0 - 1.5 pip | 1.0 -- 1.5 pip effective | fair |
| > 1.5 pip | Over 1.5 pip effective | poor |
Visualization
Effective cost comparison across account types in our broker sample: