Preschool>= Lesson Status ?
Kindergarten>= Lesson Status ?
Elementary>= Lesson Status ?
Grade 1 Support and Resistance Levels
Grade 2 Japanese Candlesticks
Grade 3 Fibonacci
Grade 4 Moving Averages
Grade 5 Common Chart Indicators
Middle School>= Lesson Status ?
Grade 7 Important Chart Patterns
Grade 8 Pivot Points
Summer School>= Lesson Status ?
High School>= Lesson Status ?
Grade 9 Trading Divergences
Grade 10 Market Environment
Grade 11 Trading Breakouts and Fakeouts
Grade 12 Fundamental Analysis
Grade 13 Currency Crosses
- What is a Currency Cross Pair?
- Crosses Present More Trading Opportunities
- Cleaner Trends and Ranges
- Taking Advantage of Interest Rate Differential
- Obscure Crosses
- Planning Around News and Fundamentals
- Creating Synthetic Pairs
- Euro and Yen Crosses
- How to Use Crosses to Trade the Majors
- How Cross Currency Pairs Affect Dollar Pairs
- Summary: Currency Crosses
Grade 14 Multiple Time Frame Analysis
Undergraduate>= Lesson Status ?
- Why Keep a Trade Journal?
- Benefits of Keeping a Journal
- What Should You Record in Your Journal?
- Potential Trading Area
- Entry Trigger
- Position Sizing
- Trade Management Rules
- Trade Retrospective
- Trading Journal Statistics
- Reviewing Your Trading Journal
- Difficulties of Keeping a Trade Journal
- Summary: Keeping a Trade Journal
Graduation>= Lesson Status ?
- Which Trading Style is Best for You?
- Which Currencies Should You Trade?
- What is Your Level of Trading Experience?
- Should You Be a Discretionary, Mechanical, or Hybrid Trader?
- What Kind of Mechanical System Suits Your Personality?
- What is Your Attitude Towards Risk?
- What Kind of Stop Suits Your Trading Style?
How Leverage Affects Transaction Costs
Besides amplifying your losses, leverage also has another way of killing you. It's a much slower kind of death though, kinda like dying by a thousand cuts.
Most traders don't see it coming and by the time they notice it, they're DEAD.
This killer I'm talking about is the associated transaction cost of using high leverage.
Not only does leverage amplify your losses, it also amplifies your transaction costs as a percentage of your account.
Let's say you open a mini account with $500. You buy five mini $10k lots of GBP/USD which has a 5 pip spread. Your true leverage is 100:1 ($50,000 total mini lots / $500 account).
But check this....you paid $25 in transaction costs (($1/pip x 5 pip spread) x 5 lots)).
That is 5% of your account!
With one trade, and the market not even moving yet, you're already down 5%! If your trades lose, your account balance shrinks.
As your account balance shrinks, your leverage increases. As your leverage increases, the faster your transaction costs eats away at the little money you have left.
This is the slow and silent killer I'm talking about.
The higher your leverage, the higher your transaction cost as a percentage of your trading capital.
This is why transactions costs is one of the six most important factors when choosing a broker.
If you have a mini account, and open a trade with a 5-pip spread, which equals $5 transaction cost, look at how the relative value of your transaction costs increases with more leverage.
|Leverage||Margin Required||Cost as % of Margin Required|
Now you've learned how leverage can magnify your profits and losses, but also your transaction costs.
Leverage does not equal margin.
Leverage is how many times you lever your whole account.
The maximum amount that you are allowed to lever is dependent on your margin requirement.
While you are logged into your account,
you can save your progress in the School of Pipsology!
- Leverage the Killer
- Leverage and Margin Defined
- Margin Call Exemplified
- Margin + Leverage = Possible Deadly Combination
- Negative Effects of Leverage
- More on Leverage
- How Leverage Affects Transaction Costs
- Don't Underestimate Leverage