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Understanding the Expense Factor

Now that you have a brokerage account and you are all ready to go, it’s really easy to just start making trade after trade. This, however, is a really easy way to lose your money quickly. Brokers are businesses, and while the legitimate ones are not there to outright take your money away from you, they do have fees and commissions that they charge for each transaction that you make. Some fees might seem hidden, but they are all there and should be clearly stated. If you trade haphazardly or with too much frequency and not enough cash per trade, you will find that even a strategy that seems like it should be making a profit is going to be a losing one once this happens. Let’s look at why this happens and what you can do to not let it happen to you.

Breaking Down Fees

Every broker will charge you to make a transaction. In the stock market, you are charged a commission per trade. These can range from $5 to $35 per each basic trade, and when you start specializing with stops and short sales, things get even more expensive.
Costs Money to Trade
Forex brokers also charge a fee, but this is a bit harder to see at first. It’s called the spread, and it is the difference between the bid and the ask price, what you are getting as an exchange rate when you begin a trade, and what you are getting when you close the trade. Usually, this is only a fraction of a penny per dollar, but in order to be profitable in the Forex market, you need to trade several hundred dollars (after leverage, usually) per trade. It adds up quickly.

In binary options, the fees are even harder to spot, but once you look at payment structures, you will see it. When you lose a trade, you lose all that you had risked. But when you are correct, your profit rate is seldom above 82 percent. That’s an 18 percent difference, and it requires you to be right in your predictions far more than 50 percent of the time if you want to turn any sort of a profit here.

Regardless of how you trade, you need to account for this in your results. When you buy a couple shares of Apple, for example, you would need the price of the company to rise enough to cover the commissions taken out between when you begin your trade and when you close it. If you are getting charged $20 per transaction, you would need the amount of shares that you bought to increase in value by over $40 in that time. Since shares don’t typically move $20 per day, you would need to buy more than two. Let’s say that Apple moves $2 in one day. To cover commissions, you would need to buy at least 20 shares. At $130 per share, that ends up being more than $2,600 put at risk, just to turn a small profit. This is an extreme example, but it is a principle that you should apply to each and every trade you make in any marketplace.

Learn the Right Way

If you aren’t learning as you go, eventually your lack of knowledge will catch up to you. Markets change quickly and what works today might not work tomorrow. You need to keep up with trends, learn from them, and try to stay ahead of them. If you spend too much time trading and not enough observing and learning from the markets, you will get left behind. Most sites have a number of tools that you can use to help you educate yourself and keep up with new strategies. There are also tons of good blogs and ebooks out there designed to keep you up to date on how to be as profitable as possible in your marketplace.