Is Forex trading expensive?
That question is actually a bit trickier to answer than would appear at first glance. If you are purchasing a home, there would be a price range to use for comparison. While this price range might vary depending on “location, location, location”, there would be a concrete way to define “expensive”. Comparing it to a figure like average annual income, or median home value where you would be looking. On a more, micro level, you can compare similar homes in a given neighborhood to asses whether that particular house is as expensive compared to ones like it.
But, when it comes to evaluating expense in trading, it is not that simple. So, in order to simplify “Is Forex Trading Expensive?”, I will compare the 4 main costs associated with trading regardless of a broker.
2 costs are tied to the broker and markets themselves, while the third cost comes down to YOU, the trader.
Forex brokers for the most part charge a fee for entering and exiting a trade. This is simply a transaction cost, very similar to what equity brokers charge when you purchase or sell shares of stock. You pay a set price based on a standard lot size which is represented as 1.00 or (100,000) units of base currency. If I had to name a “median” or “normal” price for this size in Forex I would approximate this to be about $7.00 total (entry plus exit).
Of course, if you are trading a smaller lot size, this cost would go down relative to the lot size. For example, a 0.10 standard lot (mini lot) represents 1/10th of a full lot. This would cost 1/10th the cost or $0.70 for the transaction. Compared to what most equity brokers charge for purchasing and selling stocks, it could be said that the commission cost in Forex is actually LOWER than trading stocks.
There are actually two prices to every market that exist at the exact same time, at any given time within the forex world. One is called a “bid” price or the price someone is willing to purchase a position for in any given pair. Then there is an “ask” price. This is the price that someone would be willing to sell you a position for any given pair.
Because at any given moment in time, it will always cost more to buy while you would gain less to sell, the difference between the two prices is called the “spread”. This exists because the broker is acting as a “middle-man” between the buyer and seller in the transaction. They access liquidity providers to obtain the actual trades. This cost, however, although important, can vary wildly from one broker to another. One pair to another. It can even vary wildly on the same pair, on the same broker, depending on the circumstances. In simplest terms though, the lower the spread, the lower this variable cost of trading ends up being.
This can be a cost or actually a rebate on your trading depending on the broker. It also depends on which pair you are holding, and in which direction. You see, every Forex pair is made up of two currencies, which may have different interest rates associated with them. Since banks do not stay open 24 hours a day, they must transfer positions once a day to an open bank as one set of financial institutions close.
This generally happens at the very beginning of the Asian session. When holding a position from one day to another, you must either pay the interest differential between the two currencies, OR be reimbursed for the holding if you are on the right side of that trade. Keep in mind though, even when on the “positive” side of the rollover position, you will generally earn less on rollover than you would lose from being on the other side of the trade. This cost/rebate will be the greatest when there are the largest differentials in interest between two currencies. It only applies if you do indeed hold the currency through the time of day where rollover occurs.
This cost comes down to trader skill and experience. Although technically not a “cost” in the same sense as the three I have already mentioned above. I have placed this in here for newer traders considering starting with a live account versus a demo.
The markets can be used to make money if used properly. Alternatively, great sums of money can be lost very quickly if the trader uses Forex like a casino. For example over-leveraging positions when you do not understand how to trade. Or any other myriad of reasons why someone might lose money in the actual trading itself.
There are NO guarantees of success, no matter which system, strategy, or program you might be using. A good rule of thumb is that if someone PROMISES you success in trading, you will likely experience the exact opposite of that. Don’t hand over your money for what they are trying to sell you. So, while “Is Forex Trading Expensive?” can be relatively easy to answer in terms of transactional costs as listed above, there is always the chance that your actual trading capital can be lost and that’s the part of trading that can make it expensive.
In summary, there are various costs associated with Forex Trading. It has been my experience that Forex Trading is actually cheaper in most cases compared to other types of trading in terms of costs of the transaction itself. The learning curve, due to leverage can be a steep one, and cost many traders their actual trading capital which cannot be underestimated as a real cost of learning the market. Unless of course you actually learn on a demo account until you are really proficient enough to trade with real money.
So the simple answer to “Is Forex Trading Expensive” is “Not really, but it can be if done incorrectly”. That’s why it’s so important to learn properly how to do it rather than simply doing it because you have some money to invest.
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