What kinds of obligatory and additional expenses are there in Forex? What must never be cost savings at? How to reduce your expenses and start earning more?
Making up a financial plan of costs and income helps you optimize trading and shows your total trading performance. It displays what the share of costs is in the total income, helps you organize costs segment on the balance and predict potential expenditures for the next period. Making up a financial plan disciplines traders and encourages them to manage their money in a more sensible way. You will learn from this article what makes the bulk of expenses in Forex and how you can cut the costs.
Traders’ expenses in Forex and the ways to optimize them
Have you ever tried to calculate how much money you spend in trading on different commission fees, associated costs and so on? It is seems to be obvious, one should choose the broker and the instrument with the lowest spread. But if one makes up a table of costs, it may turn out that the proportion of spread is not so big. No clear financial plan is a common beginners’ mistake.
What is cost planning for?
- A plan helps to organize expenditures and income. A table displays, what expenditures are obligatory, and what ones can money be saved on.
- A plan is a kind of a business plan that builds a base to predict the quantity growth and the quality of trading extension.
- A plan disciplines. Following the plan, a trader can find out what cost segment can be increased and on what expenses.
Planning your expenses is like planning your family budget. If there isn’t any, then the money “disappears somewhere” at the end of the month. But if there is a plan, including components and segments (cost, investment, cumulative ones), the money is managed more efficiently and wisely. Read on about major traders’ expenses and the ways to optimize them.
Types of commission fees and expenditures in Forex trading
Expenses in Forex can be roughly divided into two types: obligatory and optional ones. Obligatory (mandatory) expenditures are commission costs, set by brokers, which can’t be influenced by traders (that is they can’t be changed). Optional ones are additional expenditures that depend on traders’ needs, their strategies, objectives, etc. They can be changed or removed at all.
1. Obligatory costs
1.1. Spread. Floating or fixed. It is a commission fee, a broker receives for buying or selling an asset, that covers broker’s expenditures on a transaction and includes its profits. How to cut spread costs:
- trade liquid currency pair, which, due to their liquidity, have a narrower spread than unpopular ones;
- use the service of return of a part of the spread. Spread can be compensated in a partnership program with a rebate service;
- do not chase narrow spreads. If brokers don’t earn on spread, they will make profits from hidden commissions;
- minimize trading with scalping strategies, avoid hedging.
1.2. Slippage and Re-quotes. There is a slippage when offer and demand are not balanced in the market. A trader puts a buy order at a certain price, but while he is doing it, the price has already moved up and becomes less profitable. Broker sends a request to the trader whether it is relevant to open a position at the new price. While a trader is making up their minds, the price goes higher. Because the position wasn’t initially opened at a good price, a trader loses the money. The speed of putting an order depends on the provider and the speed of the price changing.
You can cut the slippage costs in the following ways:
- Adjust in MT4 the parameter of slippage limit, so that you’ll avoid losses due to the re-quotes;
- Use pending orders, putting them a few points higher or lower, according to the price direction. Simply put, you don’t open a position right away, but anticipate the price next move, and put a pending order in the same direction;
- Don’t trade at least for an hour before and after an important news release;
- Trade in comparatively long timeframes (from H1 and longer);
- Never save on the Internet connection, data transmission rate and hardware.
1.3. Swap. It is a commission fee charged for holding a position overnight. In exceptional cases, you can even gain on swaps, as the commission fee depends on the central bank interest rate. You can cut down on swaps by means of analyzing your positions opened. Middle-term trades with a lack of profit prospects should be closed.
1.4. Commission on the account turnover. It is charged on ECN accounts for each traded lot.
1.5. Payment for money withdrawal. In addition to the commission charged by the payment system, a broker can also charge a payment. Some brokers, on the contrary, try to meet their clients’ interests and compensate the commission on transactions.
1.6. Zero activity fees. It is charged if a trader with topped up deposit has entered no trades during a certain period of time (1-3 months).
1.7. Taxes. This budget line is often ignored by traders, and brokers do not emphasize it, writing in small letters whether they are tax agents. This expenditure item can cover over 10%. If a broker is a tax agent, it charges and deducts the tax automatically. If in trading with digital wallets the need to submit the declaration is ignored, then when working with Visa, Mastercard, bank payments you will still have to explain the money’s origin. The situation is worse when the trader and the broker are in different countries that do not have an agreement on “the avoidance of double taxation”. First, the broker deducts it % according to the local laws, next, the trader will have to submit the declaration where he lives.
- Important: most of obligatory expenditures are indicated in the offer and trading terms and conditions. When you top up your deposit, you automatically agree with the conditions.
2. Optional expenditures
2.1. Hardware and software equipment. It includes:
- Buying a computer, whose capacity meets the broker’s requirements and the standards of trading (broker’s support service helps you to choose the configuration). Advanced traders buy a few monitors for their PC for multi-currency testing and trading with several terminals. A laptop is not appropriate for such tasks, but it is much more convenient in a trip;
- VPS server and uninterruptible power source. It is essential for continuous trading. For example, in case of the internet connection dropout, the trailing stop won’t work without VPS server, algorithmic trading is forbidden without the server. Rental prices vary from $5 to $100 per month, according to the memory, processing capacity and core CPU.;
- Mobile devices and licensed software. It is an optional expenditure line. You can download a free trading platform, but you have to pay to rent a trader journal.
2.2. Signals and advisors. Everything, available for free, obviously needs correcting due to the constant changes in the market. Free robots can be applied only for testing or back-tests, but there are no efficient free expert advisors, let alone signals. You have a few options:
- Develop your own trading strategy (it may take you a few months) and order an expert advisor;
- Select a complete strategy or advisor and order its optimization. Buy a complete advisor, having carefully analyzed its trading statistics and checked its credibility beforehand, receiving an investor password;
- Consider social trading, rather than paid signal services.
2.3. Commission fees charged by PAMM managers in the social trading. The commission amount can be fixed (for example with PAMM accounts) or relative. On average, a commission fee in social trading is about 20%-40% of the profits. It is specified by the trader in the offer and depends on the number of investors, the income.
2.4. Investing in paid seminars, training courses and other means of education. At an initial step, there is no such expenditure line, as there is quite a lot of free analytics and videos; there is no need in paid ones. These costs emerge when a trader realizes that their performance is limited and the profits don’t increase any more. Or when they need practical private lessons by professionals. At some point, it becomes more cost-effective to turn to paid training services than to go on making your own mistakes.
2.5. Investing in promotion of referral partnership. Any broker has their affiliate programs, suggesting some bonuses to the referrals for each attracted client (a fixed amount or % from the turnover). It is an extra source of income that can be turned into an independent business. You can do it in the following way:
- As a professional investor, publish your articles on third-party trader resources and forums, by the way, recommending cooperation with a certain broker. There are almost no costs, the income depends on the trader's credibility by potential clients;
- Make your own blog that will be the platform for promotion of one or several brokers. The blog should be continuously filled with interesting content, including videos. The advantage of this way is not that high expenditure on developing the website and its promotion. The drawback is that the content must be very interesting and catchy, and so, you need to spend a lot of time, attracting the audience;
- Aggressive attraction of the possible clients on social network services, forums and so on. It takes minimum investment to develop a simple website or a page on social network services.
How to manage your costs and incomes:
- compare the amount of expenditures and incomes in the total balance sheet. The amount of spending should increase proportionally to the incomes. If you costs increase faster than the amount you earn, change your strategy and so on. If the incomes increase faster, reinvest them;
- rationally manage your income bearing part of the capital. Divide it into a few “baskets”: incomes to cover the costs, profit (make it a rule to convert a certain part of your income into the fiat), contingency reserve in case of unexpected costs, and investment basket. The investment component can be divided into a few parts as well: a part to increase your trading volume, a part to try and check new strategies, a part to invest in conservative trading instruments and diversify the risks.
Let’s sum up. What you must spare no money on:
- Equipment: the quality of internet connection, computer capacity, VPS server;
- Training. Education is the key to successful trading. Even if free materials form the Internet are enough at first, you can gain the practical experience only on a paid basis - from your own errors, or form professionals’ experience;
- Commission fees for managers in social trading. Professional traders respect their work, invest in professionalism, engaging the minimum risks;
What you may save money on:
- Swap. If you close non promising and low-profit positions at the end of the day, or before the weekend;
- Trading advisors and strategies. You’d better spend your time and develop something of your own, improving your experience at the same time, rather than buy something of someone else, which should not necessarily be efficient.
- Taxes. I don’t recommend evading the taxes, but you can reduce your tax costs, at least avoiding the double taxation;
I will be happy if you add some more information about traders’ expenditures in the comments. I am also interested in the ways you manage your budget and cut your costs.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.