In foreign exchange trading, how leverage affects transaction costs

In addition to magnifying your losses, leverage can also kill you in another way. Although this death process is relatively slow, it is a bit like a death sentence.

Most traders are unaware of its arrival, and by the time they do, they are already dead.

The killer I'm talking about is the transaction costs associated with high leverage.

Leverage not only magnifies your losses, but also increases your trading costs in proportion.

Suppose you open a mini account with $500. You buy 5 mini lots of GBP/USD with a spread of 5 pips. Your time leverage is 100:1.

To check... you paid $25 in transaction costs (($1/pip x 5 pips) x 5 lots).

That's 5% of your total account.

Just one trade, before the market changes, your account is reduced by 5%! If your transaction is damaged, your account balance will shrink.

As your account balance shrinks, your leverage increases. The more leverage you have, the less time it takes for your trading costs to eat up the little money you have left.

This is what I call a slow, silent killer.

The higher your leverage, the higher your transaction costs as a proportion of your account funds.

This is why transaction costs are a choicebrokerIt is one of the six most important factors.

If you have a mini account, the trade spread is 5 pips, which is equivalent to the transaction cost of 5 pips. See how your transaction costs increase relatively as leverage increases.

Now you understand that leverage not only amplifies your losses, but also increases your trading costs.

Leverage is not the same as margin.

Leverage is the ratio of your trading amount to your overall account balance.

The maximum leverage you can use depends on the required margin.