How leverage affects transaction costs

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

Most traders cannot detect its arrival, and by the time they do, they are already dead.

The killer I am referring to is the transaction cost associated with high leverage.

Leveraging not only amplifies your losses, but also proportionally amplifies your transaction costs.

Assuming you use500The US dollar opened a mini account. You bought it5Mini Hand Pound/USD with a spread of5Point. Your time lever is100:1。

Check it... you paid25Transaction costs in US dollars((1dollar/spotX5spot) X 5hand)。

That's the total amount of your account5%。

Just one transaction, the market has not changed yet, and your account has decreased5%! If your transaction is damaged, your account balance will shrink.

Due to a decrease in your account balance, your leverage has increased. The more leverage you have, the shorter the time it takes for your trading costs to eat up the little money you have left.

This is what I call a slow and silent killer.

The higher your leverage, the greater the proportion of your transaction costs to account funds.

That's why the transaction cost is the choice of a broker6One of the most important factors.

If you have a mini account, the trading point difference is5Point, equivalent to5The transaction cost of the point. 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 equal to margin.

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

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