High Trading Cost and Risk as your Worst Enemies

These two factors are responsible for traders who lose money in the long-run and they will be analyzed below.

The Trading Cost and Trading Risk Becomes Greater in Short Periods of Time

The Trading Cost when trading common stocks or other non-leveraged financial assets is limited. But when comes to derivatives, the trading cost can be really significant.

An Example on EUR/USD

Measuring the Cost in terms of the Spread Charged

The cost of derivative trading includes mainly the spread between the Ask/Bid and trading commissions based on volume. In our following analysis, we will assume the trading cost includes only the spread and no trading commissions.

When trading the most popular Forex pair, EUR/USD, the trading spread is between 0.5 and 4.0 pips maximum. You may find even narrower spreads but remember that we assumed no-trading commissions.

In other words, the spread on EUR/USD is from 0.00005 to 0.0004 of the actual value of the trade.

■ The spread counts about 0.00005 to 0.0004 of the value of the Trade

To show up our case we will assume an average spread of 1.5 pip on EURUSD without commissions or other fees charged.

A trader opens a Forex / CFD account by depositing $1,000.

Now if this trader opens a position of one micro lot ($1,000), he will pay:

■ $1,000 X 0.00015 = 15 cents USD

But no derivative trader opens an account worth $1,000 to open positions worth $1,000. So if we assume a deposit of $1,000 and that an average trader uses leverage 100:1 he will open an average position of 1 standard lot ($100,000) then the trading cost in a EURUSD trade of 1 lot will be:

■ $100,000 X 0.00015 = 15 USD

It seems like a reasonable cost given the profit potential. But the thing is that this is the cost of a single trade. Usually, day-traders and especially beginners are executing tens of trades each day. Let's assume 5 EURUSD trades per day.

■ 5 trades X 15 USD = 75 USD

In just a trading week (5 days) this trader will have pay:

■ 5 days X 75 USD = 375 USD

In overall, the trading cost for a trading week will count of 37.5% of the total value of this trader’s account.

It is obvious that even in the most competitive trading asset (EURUSD) the trading cost can be disastrous when executing a lot of trades. We assume no profits and no losses. Why? Because in the short-term you are exposed to what is called the “Market Noise”. Market noise cannot be forecasted and thus cannot be traded profitable, especially as concerns non-professional traders.

Investing risk can be reduced using multiple diversification methods and tools.THE TOP 10 STOCK-MARKET RULES

These are some rules for equity traders.

1st Stock-Market Rule

“The Market is Unpredictable”

You can never predict the future, if you ever can, don’t waste your time investing in stocks and other financials.

 

2nd Stock-Market Rule

 

"Portfolio Diversification is Crucial"

 

Diversify heavily your portfolio. Diversification of risk is the only rule that is always valid in any form of investment. Diversify in terms of different companies, industries, countries, and currencies.

 

3rd Stock-Market Rule

 

"Smart-Money is Stronger in Short-Term Trades"


When you try to trade the market in short time periods (ie intraday), keep in mind that you compete with professional and trading-specialists (hedge funds, bank dealing rooms etc). These professionals form what is called Smart Money. Smart money can rarely be beaten by non-professional traders.

 

4th Stock-Market Rule

 

“Buy The Rumor & Sell the Fact”


Buy the rumor and sell the fact is a tactic widely used by professionals. Stock-market prices usually incorporate any good news long before they actually happen.

About TradingCenter

TradingCenter provides essential information and tools for learning and trading the Global Financial Markets. TradingCenter helps investors to improve their skills and their level of understanding regarding core mechanisms of the trading process.

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18 March 2019
17 March 2019
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