💱 The Combination of Trading Cost and Risk as Your Worst Enemy

When trading with 1:1 leverage, your trading cost and trading risk remain relatively low. But when you trade derivatives, both your risk and transaction costs increase significantly.

Trading risk, combined with trading costs, is the primary reason why traders lose money over time. Let’s break them down below.

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Highlighting the Impact of Trading Cost When Using Leverage – An Example with EUR/USD

If you trade Forex currencies, the trading cost includes the spread between the Ask and Bid, and in some cases, volume-based commissions (if you're using an ECN/STP broker). In this example, we’ll focus only on the spread and ignore any commissions.

When trading the most popular Forex pair, EUR/USD, the trading spread typically ranges from 0.6 to 1.8 pips. You may find even tighter spreads, but again—we're assuming no commissions.

In simple terms, the EUR/USD spread represents about 0.00006 to 0.00018 of the trade’s value. To demonstrate, let’s assume an average spread of 1.5 pips on EUR/USD, with no additional fees.

🔍 Example:

A trader opens a CFD account (no trade commissions, just the spread) and deposits $1,000.

If the trader opens a position of one micro lot ($1,000), the cost is:

■ $1,000 × 0.00015 = $0.15

But traders don’t usually open a $1,000 account just to trade $1,000. In our example, the trader is highly speculative and uses leverage of 100:1. That means with $1,000, he risks one standard lot ($100,000).

In this case, the trading cost for one EUR/USD trade is:

■ $100,000 × 0.00015 = $15.00

That may seem like a reasonable cost, given the profit potential. However, this is the cost of just one trade. Day traders—especially beginners—often make 5 to 15 trades per day. Let’s assume 5 EUR/USD trades per day.

■ 5 trades × $15 = $75

Over a 5-day trading week, this trader would pay:

■ 5 days × $75 = $375

👉 In total, the trading cost for just one week would be 37.5% of the trader’s account.

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Day Trading: As Predictable as an Ongoing Earthquake

Even when trading the most competitive asset, such as the EUR/USD, trading costs can be devastating if you trade too frequently. In our previous example, we’re assuming no profits and no losses. Why? Because in the short term, you’re exposed to what’s known as “market noise.” Market noise is unpredictable and cannot be traded profitably—especially by non-professional traders.

Market noise is like an earthquake—it cannot be predicted and should be avoided.

The following chart shows the 1-minute percentage changes of EUR/USD during a random trading day, and a random earthquake that occurred in Western Nevada in the last days of September 1994.

Chart: Day Trading is like trying to guess a never-ending earthquake

Simple Tips for Reducing Risk

Limiting your leverage and setting the right stop-loss orders can greatly help control risk. Here are some tips for all types of derivative traders:

■ Keep your trading leverage at no more than 10:1

■ Only deposit enough funds to cover the trades you plan to open right now

■ Trade financial assets with tight spreads

■ Calculate your risk/reward ratio accurately

■ Give your stop-loss enough space. Don’t set it just below the first support level—place it below the second support level

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Managing Both Your Trading Cost and Risk

First, choose a broker that meets your needs. You can use our reviews or research elsewhere for guidance. A good broker should offer competitive costs and protect your funds, which usually means strong regulation by trusted financial authorities. 🔗 More » Compare ECN/STP Forex Brokers

Here are some tips to help reduce trading risk:

■ Open an account by depositing only 5–10% of your total available funds. For example, if you have $10,000, deposit no more than $500–$1,000.

■ Use a demo account to test both your skills and your broker’s trading conditions before risking real money.

■ If you’re a beginner, trade with a micro or mini-lot account. There’s nothing wrong with starting small while you’re still learning.

■ Trade small positions and allow enough room for your stop-loss. High leverage forces tight stop-losses, which makes you more vulnerable to market noise.

■ Each trade should have a profit/loss ratio above 2. That means: {Potential Profit – Spread} > {2 × Potential Loss}. 🔗 More » The Optimal Trading Leverage Formula

■ Avoid trading during major news events.

■ Respect key support and resistance levels when placing trades.

■ Set your stop-loss below the second support when buying, and above the second resistance when selling.

■ Use a trading strategy focused on mid-term trends. Avoid short-term setups.

■ Avoid intraday trading. As mentioned earlier, it exposes you to unnecessary market noise.

👉 If you follow the crowd, you won’t succeed. Keep adapting your strategy and mindset. Think and act like the top 5% of traders—not the majority of retail traders

 

■ Trading Practices to Reduce Costs and Manage Risk

G.P. for TradingCenter (c)

13th of June 2013