REDUCING YOUR TRANSACTION COSTS

                                        In terms of risk, another reason I promote long-term trading is to reduce
transaction costs. Currency dealers are very good at marketing the notion
that somehow the currency market is cheaper to trade because there are

no commissions. The reality, however, is that trading currency can be very
expensive due to the spread charged on each trade. Using typical leverage,
a standard lot account may pay $20 to 50 per lot to open a position.
If you trade 10 lots, the total transaction costs are $200 to $500 per
trade! The bottom line is that the more often you trade, the higher are
your transaction costs. Short-term traders must work much harder to turn
the same profit as a long-term trader. Consider the transaction costs in
Table 4.1 for earning 500 pips in profit.
Table 4.1 illustrates how transaction costs become a significant percentage
of a trader’s profit the more frequently that trader trades. This
example assumes standard lots with 100:1 leverage trading the euro/U.S.
dollar currency pair with a two-pip spread. The trader who made 50 trades
had to earn $980 more than the trader who made one trade to gain 500 pips

overall. Additionally, traders who are constantly jumping in and out of the
active marketplace are more likely to encounter slippage. Whenever a currency
dealer is unable to complete a trade at the price requested by the
trader, it is known as slippage. Traders who focus on trading the news or
other times of high market volatility might not get the price they want and
spreads can widen, adding to their transaction costs. Clearly there is a significant
advantage in transaction costs for traders who focus on long-term
trading.