How Transaction Costs Can Fail Your Forex Strategy?
Discover a revolutionary Forex Robot that made 2,300% NET PROFIT in 2009 and download the Forex Auto Detector Software FREE that can increase the performance of any forex robot by 53% and more. Get these Swing Trading Informants plus the Forex Profit Accelerator End of Day Trading Kit FREE. Read these Correlation Trading Cheatsheets FREE. People often get excited about their trading strategy, charting package or automated system but they rarely pay attention to spreads and volume rebates. It’s not your fault. The design of the platform does not really show you how much you are paying in transaction costs, you are simply buying on the ask and selling on the bid.
Over a large enough sample size of trades, transaction costs make a huge difference. So if you want to be successful in trading make sure that your account is not slowly being eaten away by transaction costs. Let’s look at the hard numbers. Just ask yourself this question…
How many lots do I trade in a month? Say the average answer is 50. This means that on an average spread of 3 pips you are paying $1500/month or $18,000 per year in transaction costs. On a $50,000 account this means that you have to gain 36% just to break even.
Calculate this number out in percent terms and you will see that regardless of your account size or the volume, a large percentage of your account is being spent on transaction costs. Even if you are a small trader, volume rebates add up. Let’s say that you trade 10 lots a month on a $1000 account. With just a $5 per lot rebate you are making an extra $50 per month. This improves your trading performance by 5% a month or 60% per year. Any trader in his right mind will jump at the chance to enhance his results by this much.
Now, you cannot avoid transaction costs. The key is to minimize them without sacrificing the quality of your Forex broker. One thing you can do is get a volume rebate from your introducing broker. This way you will receive a cash bonus for every trade you make.
The way this works is that the Forex dealing firm will pay the broker for referring you to them. In return the introducing broker will give you a cash bonus. This bonus can minimize your transaction costs and thus enhance your success. So let’s say you could get rebated even one half of a pip back from your IB. On 50 monthly lots that’s $250/month which is $3,000 per year.
With $3,000 you can do a lot of things… Go on a few vacations this year, buy a nice flat screen TV, or a nice watch. The bottom line is its complimentary money. Hopefully you guys understand how important transaction costs are. Keep in mind of course you do not want to just look for the cheapest place. What good is a 1 pip spread when you cannot withdraw your money when you are done trading? So here is a specific example of how a volume rebate can enhance your success…
Let’s say you have a strategy in place that pays 10 pips when you win and stops you out with a 4 pip loss when you lose and is accurate 50 % of the time. Sounds like a good strategy so far right? Well it is until you add in the spread. Let’s say that you have a 3 pip spread.
If you make 100 trades with the strategy…
On your 50 winning trades you make (50 trades * 10pips) $5,000
On your 50 loosing trades you loose (50 trades * 4 pips) $2,000
So you should be up $3,000…Well now let’s look at the transaction costs…100 trades times 3 pips is $3,000…So now your system which should have made money is flat. This is a shame, you have a great system and the transaction costs are eating your profits up.
Tags: Forex, HUD Homes, money, Trading
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