The foreign currency exchange markets can be a great place to trade your capital, and many traders who choose to do so are able to increase their investment capital over time. Losses in the markets are the main restricting factor that weighs against the profits you can achieve, and these losses need to be reduced wherever possible through sensible trading and cautious risk protection methods. But there are other burdens on the profits that you are able to achieve in the markets, most notably the costs of trading your forex positions. These are expressed in a couple of different ways, but are a direct cost and handicap on the amount of profit you can make from your trading.
Understanding the impacts of costs on your trading results demands an understanding of the types of cost structures brokers deploy. But how does this fit within the wider context of trading foreign currency? Moreover, are the cost pressures on currency transactions more or less severe depending on the type of positions you are trading?
Long Term Foreign Currency Exchange Trading Benefits
Trading over the long term is actually one of the most effective ways to reduce certain costs, in spite of skewing the overall balance in favour of more significant costs. Longer term positions are capable of making more money for you in the long run, and so this makes it more desirable for traders to trade these positions. However, the different costs can be magnified by an increase in the amount of time it takes to trade in this way. By being more long term, you are effectively just increasing the stakes involved in every individual trade. Nevertheless, it can be possible to achieve more significant profits through long term trading positions, on account of the markets being able to move at a more consistent and considerable rate.
The Costs Of Foreign Currency Exchange Trading
There are two main costs involved in foreign currency trading. The first is the spread, which denotes the entry and exit prices in the markets. The spread is essentially a handicap on your performance, acting against the money you are able to make to trade. Different brokers and markets have different spreads, some tighter than others. Where the spreads are tighter, the costs are cheaper, and this is replicated twice for every transaction when positions are opened and closed. When you multiple this by the size of your stake across the lifetime of your trading, this can easily be seen to be a considerable cost for your account to bear.
The Risks Involved In Trading Foreign Currency Exchange
There are many risks involved in trading foreign currency exchange. The main risk is that the positions you have traded will not work out, and that leverage will start to cause problems for your trading. That is a risk faced on every transaction in forex, and you need to research yourself to safety, by trading on better positions in the first place. During the trade, keeping these risks low will ensure you are only bearing the costs – which if you have chosen a cheap broker will be less severe than they could otherwise be.