Leveraged Forex Trading vs Straight Transactional Forex
When trading Forex online, it is essential for traders to know how leverage works and how it can affect transaction costs. In addition to amplifying losses, leverage can also kill a trader. Most traders do not see this coming and by the time they realise it, they have lost a significant amount of money. Leverage can also amplify the transaction costs as a percentage of the account. For example, say a trader opens an account with $500 and they buy five mini $10k lots with a 5 pip spread. This means the true leverage is 100:1, $50,000 mini lot with a $500 account. This also means the trader has paid $25 in transaction costs, which is 5% of the account! With a single trade, 5% of the account has disappeared. If the trade loses, the balance shrinks quickly.
As Forex account balances shrink, the leverage will increase and as this happens, transaction costs can eat away at eh small amount of money that is left. The higher the leverage, the higher the transaction costs. This is why transaction costs are one of the most important factors to consider when choosing a Forex broker online. However, it is possible to lower the transaction costs that banks take when trading Forex. The first thing to do is find a broker that has lower leverage. While this can decrease profits and minimise trading activities, it can greatly reduce the transaction costs associated with such trades.
This can be a difficult task since most Forex trades are highly leveraged. However, by choosing the right broker and paying attention to transaction costs, it is possible to pay less while still enjoying the action and great rewards offered in the Forex market. One thong for trades to be aware of is over leveraging. While this can allow for more trades to be conducted, it comes with a much higher risk to the trader. Lost trades could result in huge losses in the account.
Leveraged Forex trading is the most popular form, but with this comes great risks. Traders should take time to compare different brokers to see the leverage and the costs associated and try to trade to reduce the amount that banks will take on the transactions that are being conducted.