Understand your hidden trading costs
Posted 10-14-2008 at 12:54 PM by LearningMarkets.com
Understand your hidden trading costs
by John Jagerson
Trading costs in the forex can be a confusing topic. If you believe the marketing then you would assume that costs are very low because there are no commissions. However, this is a little deceptive. For an average size, short term-trader, the forex can be one of the most expensive markets to trade when you consider the relationship the spread has with likely losses or gains.
If you could see a pool of average forex traders you would notice something interesting commonalities. The average forex investor tends to trade fairly short term and when market volatility goes up they tend to trade more frequently. I think the two factors are actually related. Short term traders usually have fairly tight profit targets and stop losses, therefore if the average daily trading range increases, those limits and (more often) stop losses are hit much faster, which triggers the need to get into another trade.
If a trader is making a small amount relative to thier margin in each trade then the cost of trading or the spread between the bid and ask can start to really add up. An average short term forex investor will trade roughly 20 times per month. During volatile markets that number increases to 25 trades per month. If you are an average trader then you are probably paying a 2 pip spread on the majors and "losing" 50 pips per month in trading costs alone.
To provide a little context to that 50 pip number; imagine that you are using $5,000 in margin and 100:1 leverage each time you trade. That means that you are paying $2,500 per month in costs. Of course, at PFX Global we traditionally tend to emphasize the benefits of long term trading from a costs and potential gains perspective but the real point behind this article is to start a discussion around the real costs of trading. Traders will often not consider them and dealers don't typically break them out on your statement. That means you have to plan for costs on your own before you implement a strategy.
The Video continues HERE
by John Jagerson
Trading costs in the forex can be a confusing topic. If you believe the marketing then you would assume that costs are very low because there are no commissions. However, this is a little deceptive. For an average size, short term-trader, the forex can be one of the most expensive markets to trade when you consider the relationship the spread has with likely losses or gains.
If you could see a pool of average forex traders you would notice something interesting commonalities. The average forex investor tends to trade fairly short term and when market volatility goes up they tend to trade more frequently. I think the two factors are actually related. Short term traders usually have fairly tight profit targets and stop losses, therefore if the average daily trading range increases, those limits and (more often) stop losses are hit much faster, which triggers the need to get into another trade.
If a trader is making a small amount relative to thier margin in each trade then the cost of trading or the spread between the bid and ask can start to really add up. An average short term forex investor will trade roughly 20 times per month. During volatile markets that number increases to 25 trades per month. If you are an average trader then you are probably paying a 2 pip spread on the majors and "losing" 50 pips per month in trading costs alone.
To provide a little context to that 50 pip number; imagine that you are using $5,000 in margin and 100:1 leverage each time you trade. That means that you are paying $2,500 per month in costs. Of course, at PFX Global we traditionally tend to emphasize the benefits of long term trading from a costs and potential gains perspective but the real point behind this article is to start a discussion around the real costs of trading. Traders will often not consider them and dealers don't typically break them out on your statement. That means you have to plan for costs on your own before you implement a strategy.
The Video continues HERE
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PFXGlobal.com
Profiting With Forex (PFX) started as the fulfillment of a promise made in the book, Profiting With Forex. There are so many books and sites out there that offer information and education around the forex, but we wanted to make sure traders could take the principles we offered, and apply them in the actual market.
The PFX site (www.PFXGlobal.com) is designed to give you straight-forward and applicable information that you can use in your trading today, and forever." In this blog, we will include education articles and regular commentary.
*No warranties or guarantees are made with respect to the content contained herein. The website and the guests on this site do not take into account the investment objectives, financial situation or particular needs of any particular person. The advice and trading ideas provided on this website are for informational purposes only and are not intended as a trading ideas. Under no circumstances does any advice or trading idea contained herein constitute a solicitation to buy and sell currencies. We do not endorse and cannot vouch for any of the guest traders on this site.
Profiting With Forex (PFX) started as the fulfillment of a promise made in the book, Profiting With Forex. There are so many books and sites out there that offer information and education around the forex, but we wanted to make sure traders could take the principles we offered, and apply them in the actual market.
The PFX site (www.PFXGlobal.com) is designed to give you straight-forward and applicable information that you can use in your trading today, and forever." In this blog, we will include education articles and regular commentary.
*No warranties or guarantees are made with respect to the content contained herein. The website and the guests on this site do not take into account the investment objectives, financial situation or particular needs of any particular person. The advice and trading ideas provided on this website are for informational purposes only and are not intended as a trading ideas. Under no circumstances does any advice or trading idea contained herein constitute a solicitation to buy and sell currencies. We do not endorse and cannot vouch for any of the guest traders on this site.
