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Transaction costs all forex beginners must know before start trading

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When trading forex, trading costs are very important. That is why every Forex novice must understand the concept of basic transaction costs before trading. Following is a description of the basic Forex transaction costs.

Spread

In FX margin trading, there is a difference between buy and sell prices, which is called spread. The investor will buy at the ask price and sell it at the bid price. Spreads in major currencies such as the euro, dollar, and yen are around 2 to 5 pips, and spreads in less frequently traded currencies may exceed 10 pips.

Rollover interest (Swap Point)

In FX margin trading, investors can maintain their trading positions by rolling their positions to the next day rather than liquidating them in the same day. At this time, Rollover cost is caused by interest rate difference between calls, which is called “Swap Point”.

If you do not want to pay or receive interest on your holding position, you must liquidate your holding position before the closing date. The settlement in the foreign exchange market is based on T + 2 days, so interest for 1 day for Rollover and 3 days for Wednesday will occur on Monday / Tuesday / Thursday / Friday. For reference, there are times when interest rates exceed 4 days due to national holidays.

“Swap Point” refers to the “interest rate adjustment” that occurs when you trade two types of currencies with different interest rates. For example, if you sell a low interest rate currency and buy a higher interest rate currency, you will receive the difference in interest rates. While you hold a relatively high interest rate currency, you will receive as much as the interest rate differential with your currency each day.

Conversely, if you sell a currency with a higher interest rate and you buy a currency with a lower interest rate, you will receive an interest rate differential and you will incur losses.

Notes on Swap Point

If you sell a relatively high interest rate currency or buy a currency with a relatively low interest rate, you will need to exercise caution because swap points equivalent to the number of contracts will be paid on a daily basis.

Transaction Fee (Brokerage Fee)

FX margin refers to the commission charged by the brokerage firm.

Commitment / Maintenance margin

In order to trade the FX margin, deposit margin (USD 10,000) equivalent to 10% of the contract amount per transaction unit should be deposited. In order to maintain the holding position, the deposit value of deposit must be at least 50% USD 5,000) or more.

Margin calls and forced liquidation

The market for FX margin trading is constantly changing and running around the clock, so risk management is more important than anything else. However, since investors can not directly monitor the market situation and respond to the market for 24 hours, it is necessary to provide “Margin Call Notice” and “Loss Cut “system.

Margin calls and forced liquidation The market for FX margin trading is constantly changing and running around the clock, so risk management is more important than anything else. Margin call notification and Loss Cut system are implemented to prevent any loss in excess of a certain level in preparation for such market risks. A margin call is a request to pay an additional margin in order to maintain an unfavorable position. If a margin call is notified, it means that the mandatory liquidation is imminent for the position.

Therefore, it is necessary to deposit additional margin as soon as possible after receiving the notification We recommend that you liquidate some or all of these positions. In addition, if the deposit value is below 50% of the margin margin (ie, margin margin) due to price fluctuations after the margin call notification, the system will automatically settle all positions and limit the scope of loss. If the FX market changes suddenly, it is necessary to pay extra attention because it may be required to pay extra for the overpayment loss if the margin call or forced liquidation is made.


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