Trading Costs in Forex

Anyone that is looking to place a large number of trades in the forex market will need some idea of the trading costs that are typically encountered when positions are opened and closed.  If this part of the trading process is not respected, it can be very difficult to construct a framework that will allow you to maximize profits over time.  If this cannot be accomplished, it is only a matter of time before you lose all of your money through badly structured trades.  New traders should avoid this and the first part of the process is to understand where trading costs arise when positions are opened and closed.

Spread Costs

The biggest costs that are encountered when trading forex will be spread costs.  These are essentially the costs that a broker will charge in order to allow you access to the world currency markets.  These costs are relatively low but it should be understood that some currency pairs will have higher spread costs than others.  So, for example if you are commonly trading in the EUR/USD you are likely to encounter lower spread costs than if you were to trade in the NZD/JPY.  This is because the EUR/USD is more commonly traded and that makes it easier for brokers to give you market access to that type of currency pair.

Another factor to consider is whether or not your broker offers fixed spreads.  If your broker does not offer fixed spreads, the variable rate will likely increase as market volatility increases.  In other words, this is something that will eat into your total profits even if you manage to close the trade in positive territory. It is a good idea to find brokers with a good deal of flexibility, and one option is Fibogroup.  These factors are something that should be factored into your profit and loss records every time you place a trade.

Carry Values

Other factors can be found in carry values, as all currencies are associated with a predetermined interest rate.  When dealing with a currency pair, it is generally a good idea buy a currency with a higher interest rate and to sell one with a lower interest rate.  This will prevent carry costs from limiting your profits.  Buying the currency with the higher interest rate will actually PAY as long as you hold the position.  This strategy is typically associated with the term “carry trade.”

 

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About the Author
Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. Trade ideas are generally suggestive of time horizons of one to six months.

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