Saturday, January 4, 2014
The costs of forex are broken down into two distinct categories, and it is generally the case that there is no commission to pay, as in other trades. But what exactly are the costs of forex trading, and how significant are they for the ordinary trader?
The Forex Spread
The main avenue through which brokers make money and traders are liable to costs is through the spreads quoted by the broker. The spreads are effectively the distance between the buy and sell prices, which handicap the position to a certain extent so that the trade always starts off in the negative. Depending on the broker you choose, the spreads may be wider or slimmer, and naturally traders should look to find a broker with the most competitive spread prices available in order to best achieve their trading ends.
The wider the spreads, the more the trader will be expected to pay in order to enter the trade, and when this effect is multiplied over a number of different trades it can quickly mount up into a serious cost for any portfolio. Further, the more frequently you trade the more significant these costs will become, therefore it is essential to try to keep costs to a minimum as far as possible.
The wider the spreads, the more the trader will be expected to pay in order to enter the trade, and when this effect is multiplied over a number of different trades it can quickly mount up into a serious cost for any portfolio. Further, the more frequently you trade the more significant these costs will become, therefore it is essential to try to keep costs to a minimum as far as possible.
Forex Leverage Costs
Another key portion of the costs of trading forex comes from the financing costs of leverage. Leverage is the degree of broker finance provided to inflate the size of a transaction, and traders will be required to pay financing costs for positions that roll overnight. These costs are usually expressed as a percentage of the transaction, meaning that positions held for more than the space of one trading day will be required to move further in order to reach the same levels of profitability as market fluctuations show.
Because these costs will apply to all qualifying forex trades, traders should be mindful of these when calculating potential risks and rewards from any position. Only by factoring these costs in to the equation can traders guarantee they’ve done the right level and type of preparation for the trade – especially in marginal cases, or for those trading over shorter timeframes.
Because these costs will apply to all qualifying forex trades, traders should be mindful of these when calculating potential risks and rewards from any position. Only by factoring these costs in to the equation can traders guarantee they’ve done the right level and type of preparation for the trade – especially in marginal cases, or for those trading over shorter timeframes.
