Every business has operating costs. Becoming a trader is just like becoming a professional in any other field. You should be aware that there are costs and expenses to bear and other than the money that you have to invest, you also have to
Every business has operating costs and risks. Becoming a trader is just like becoming a professional in any other field. You should be aware that there are costs and expenses to bear and other than the money that you have to invest, you also have to invest your time. The Forex market is still and may be the fastest growing financial market in the world; that is why more people are getting attracted to it. Even though there are no commissions to be paid, you do have to pay a spread every time you open a position.
In order to compete is this industry, Forex brokers have come up with very innovative ways to keep the clients coming and to keep the already existing ones happy. For instance, the minimum requirement to open an account has been lowered significantly in order to make the business more attractive to the independent investor. But we also have to consider some risks involving the currency market. For example, the industry is not defined by law in some countries; therefore, there is room for fraud and unscrupulous Forex companies that trade against their clients.
The experts at Binary Option Broker Optionova (http://www.optionova.com/) explain that there are ways for you to keep your trading funds safe and not get tricked by those dubious companies. First of all, you must have a very clear plan of what is it that you are planning to do. This means set up a business plan that fits your trading personality, risk aversion, and level of investment capital. There is no fix formula to determine your stop loss limits, which is basically the main tool that we use to control our risk. You have to determine that on your own, regardless if it is a 10 pip stop or a 100 pips stop.
The important thing is to follow your plan diligently no matter how this may be. Discipline is the key to success not only in the Forex market, but also in all the financial markets and even in all walks of life.
A very interesting interview was conducted by the staff of Optionova, where the experts, Lilia, Sammy, and Nicholas were asked about the main costs that a trader has to face.
The first question to Nicholas by Optionova was: Professional traders have it very clear what are the costs of trading, but do beginners have to face additional costs apart from the ones faced by professionals?
Nicholas replied by saying that the question has two answers to it. First, you have to take into account the costs of education, training, equipment, connections, and then the risk of choosing a reliable broker to trade with. There is also the possibility of making mistakes that can hurt your account. The other thing is that professional traders and beginners all have to pay the spread or commission to have their orders filled. The spread is the main cost in trading, which it can go from 2 to even 10 pips per trade. The spread may also be fixed or variable. When you are trading with a variable spread, this could widen beyond your expected cost, which is why you should be very careful with this.
Optionova then asked Sammy about the difference between paying a spread and paying a commission. The expert Sammy answered this way: The broker is providing a service to you by allowing you access to the markets and providing the counterpart for your trade. This means that we have to pay the broker for its services. The spread is the difference between the asking price and the bidding price. In other words, it is the difference between the selling and buying price. This difference is what the broker receives as payment for their services. Other brokers and in other markets, instead of charging a spread, brokers charge a commission. For instance, in the futures market a commission is charged on every contract traded, which by the way, it is a lot lower than the spread traders pay in the Forex market.
We may also add that in some market places, for example in the stock exchange, brokers give clients certain discounts when their trading volumes exceed a specific amount of shares or contracts. Therefore, the more you trade, the less you pay in commissions.
In the futures market, if we take a closer look at the commissions and fees that would have to pay, because there could be some additional fees, we can conclude that it is a lot less expensive to trade futures, even if they are currency futures than trading the same currency in the spot market.
The following example can clearly illustrate what trader Sammy is talking about.
Let us say that you want to buy a futures contract on the Euro. The broker's commission is 65 cents of a Dollar per contract and about 35 cents in exchange fees. The total cost is about one Dollar per contract. On the other hand if you are trading the Euro on the spot market, the spread may be around 2 to 3 pips. With a standard lot, each pip will have a value of 10 Dollars; therefore, those 2 to 3 pips can cost you in money terms from 20 to 30 Dollars per lot. A lot in the spot market is equal to 10 contracts in the futures market. So we can conclude that you can trade 10 futures contracts for 10 Dollars, but 1 Standard Spot lot for 20 or 30 Dollars. Obviously, we can clearly see that it is a lot more expensive to trade in the spot market.
Lilia added to the conversation a very interesting fact, which is the probability that a trader has of a certain position working in his or her favor as opposed to the probabilities that the broker has.
At Optionova, its experts and team are constantly providing training and tips to traders on how to control their risks and take into account the costs of trading. The best thing that they recommend to traders is to be aware that some costs can eat into your account if you are not conscious about them. Also, keep in mind that during times of high volatility these costs can exponentially rise and cause you a loss instead of a profit.
In collaboration with the experts of Masterforex-V World Academy (http://www.masterforex-v.com), the staff at Optionova has been working very intensively to provide its clients and the members of the Academy with the best and complete information on the financial markets to make of all of you better and more profitable traders.