*Lower your trading costs and improve your bottom line*
The financial markets are currently highly volatile, acting fairly irrationally and almost everything is now considered bearish. These are tough times for trading and I am personally reverting to almost entirely cash positioning in order to avoid unnecessary losses of trading capital.
Never the less, there are some trading opportunities out there and when the financial markets begin to revert back to their normal functioning state there will be even more. Technical analysis and fundamental analysis gives you the greatest chance of entering successful trades but there is one other way to improve your long term profitability…
Lower your costs of trading!
There are 2 main factors that contribute to your long term profitability. The first is the profit (or loss) of your trading positions and the second is the costs of trading.
Profitability = Trade Profit/Loss – Cost of Trading (Spread +/- Carry Charges)
The bulk of the content on my blog site is dedicated to teaching you the analysis tools and techniques used to find and enter trades that generate profit. This is the main contributor too long term profitability but you can further improve your position by lowering your costs of trading.
Let’s look at the 2 main costs of trading in more detail.
Bid/Ask Spread – Often shortened to just spread. This is the difference between the bid price (price buyers are willing to buy at) and the ask price (price buyers are willing to sell at). This is the main cost of retail trading because your broker or liquidity provider will often add a mark-up on the current market price to earn a small fee from your trading volume. The image below shows an example of the bid price and ask price spread of the USDJPY fx currency pair.
You will notice that the bid price you can buy at (blue) is 1.8 pips higher than the ask price you can sell at. This is the spread and the cost of trading because if you were to go long 5 lots of USDJPY and then immediately sell all 5 lots, you would lose money because of the spread and this is the mark-up fee your broker has charged to cover their costs.
Carrying Charges – A carrying charge is the cost associated with holding a financial instrument over a period of time. Usually charged in points/pips per standard lot traded, it can include the costs of borrowing (for short trades), interest charges and storage costs (for trading commodities). Your broker platform should tell you the cost of carrying an instrument depending on whether you are planning to enter a long or short position.
When trading derivatives the main costs of carry are interest and borrowing because you are not trading the physical assets but contracts (options/futures) that are derived from them and that means no storage costs. This means it is possible to trade financial instruments that can produce positive carry instead of negative carry charges.
A negative carry charge is the amount you pay the broker for holding a financial instrument over a time period. A positive carry charge is the amount you get paid by the broker for holding a financial instrument. Carry charges increase with duration. Therefore, they are less important when day trading and more important when long term swing trading.
How can you reduce your costs of trading?
The broker you use is solely responsible for your costs of trading. They determine your bid/ask spread and the carry charges of the various instruments you are trading so finding the correct broker offering the best services is important.
I use IC Markets for my main derivatives broker for trading FX, Commodities and Indices.
You can see an example of their FX currency spread fees below and from my own research, I have found they are absolutely one of the best and most competitive retail brokers available.
As you can see, there is effectively zero initial cost of trading the EURUSD FX currency pair and this is similar on other major FX pairs. It is also important to remember that these spreads are post-market close on a weekday when we are seeing some of the most volatile markets in history. Usually their spreads fees across all financial instruments are much lower.
Click on the following link to view their website and see what they can offer.
Check your current broker spread fees and carry charges when you can and use the price above as a comparison. You might surprised at how much you could save!
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
FTMO Trader Funding Programme.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.