Forex trading attracts many people, but not all achieve good results in this activity.
Who are traders?
First of all, these are people who buy and sell currencies, value stocks, gold, oil, etc. As you know, the cost of these things changes almost continuously, and it is on these drops that currency traders earn. From the outside, it seems that it is quite simple, but in fact, this work has its own subtleties.
First, you need to consider all of the costs that are associated with trading.
Trading costs are the aggregate costs that an investor must bear in order to continue trading. A trader can pay for news sources or technical analysis services, but there are costs that the trader is required to pay. For each transaction made through an intermediary, the investor pays a small amount in the form of a commission or a spread.
Not all market participants pay attention to additional costs, and this often leads to disappointing results. A competent money management strategy always takes into account all optional and necessary expenses. We will take a closer look at that.
Spread is a fee to a broker for a trade. In the trading platform, the broker always indicates two prices for a currency pair: Bid (buy price) and Ask (sell price). The spread is the difference between these prices. It is due to the spread that broker companies make money. Because of this difference, at the time of the transaction, the trader is always at a loss by the amount of the spread. The quotes must overcome several points (1-10, depending on the popularity of the currency pair), and only after that, the investor will start making a profit.
Each trading broker sets its own spread, which depends on both the currency pair and market volatility. In the case of a flat market, the broker sets the spread, for example, at 2 pips, but in case of strong fluctuations in quotes, the intermediary company can increase it to take into account risks in a fast market. In addition, brokers charge traders an additional commission for large transactions that involve withdrawing money.
Spreads generally differ from broker to broker based on this IQ Option review spreads can start from about 1 pip.
The commission is a mandatory cost for a trader when he or she is working with large lots, so it is important to get enough income from one trade to cover commission costs. Commissions in the Forex market are divided into two types:
- With a fixed commission, the broker charges a predetermined amount, regardless of the trading lot;
- With a relative commission, payments to the broker directly depend on the lot size.
Sometimes the relative commission varies depending on the volume of a trade in such a way that up to a certain limit (for example, $10,000,000) it is a fixed amount, and after exceeding the limit it increases linearly.
Leverage is a tool for increasing profits when dealing with small amounts. It is the leverage that is considered one of the reasons for the popularity of the Forex market. A small level of leverage can be an excellent help when making trading operations, however, large leverage (from 100: 1) can literally eat up the deposit for several points of movement of currency quotes. The costs of such leverage can reach unacceptable levels, so it is important for a trader to choose the leverage level wisely to minimize risks and optimize profits.
If a trading operation is carried out at night, then the investor holding the position is forced to pay an additional commission. This type of expense is found only in Forex and is called overnight charges. In this case, for each currency in the pair, its own interest rates are added, and the commission is determined by the difference between them. These rates are set not by the broker company, but by the central banks of the states. For example, if a trader buys CHF/JPY, then the overnight fee will be calculated from the difference in the discount rates of Switzerland and Japan.
To protect capital from risks, traders use various hedging strategies, one of which is Forex options trading. If an investor decides for himself to ensure risks with options, then he must take into account the costs of purchasing these financial instruments. In addition, counter spot contracts for one currency pair can be used as a hedge, which also requires additional costs.
Sources of information
Information on currency pairs is not always freely available. Insiders, news sources, and analytical agencies also demand payment for data that is not available to the general public. Information has a significant impact on a trader’s actions, and a reliable source of data will give him or her a lasting advantage over other market participants. Other additional costs include magazine and cable subscriptions that give the trader access to financial news and analytics.
Thus, taking into account the “hidden” costs in trading helps the investor choose a suitable broker, determine the most profitable currency pair for trading, balance the forex trading strategy with the help of competent calculation of the lot and stop orders, and also ensure the deposit against losses.