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# Chapter 34, Part II. Overleveraging and Transaction Costs.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Apr 26, 2012.

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 Part II. Overleveraging and Transaction Costs.

Commander in Pips: In second part of this chapter I would like to touch the theme of trading costs and overleveraging with some examples – just to show you how dangerous leverage is.

In the beginning just couple of words how leverage impacts on your transaction costs. Let’s assume that you trade EUR/USD and pay no fees and commission, except for the bid/ask spread. Let’s say that this spread is 2 pips, so when you open and then close your trade you have to pay 4 pips totally as your trading expenses. Here is information to think about:

 Leverage 2xBid/Ask Spread, Relative to Your Position Bid/Ask Spread Paid as a Part of Your Capital, % 1:1 4 pips = 0.0004 0.04% 1:2 4 pips*2 = 0.0008 0.08% 1:4 4 pips*4 = 0.0016 0.16% 1:8 4 pips*8 = 0.0032 0.32% 1:16 4 pips*16 = 0.0064 0.64% 1:40 4 pips*40 = 0.0160 1.60% 1:100 4 pips*100 = 0.04 4.00% 1:500 4 pips*500 = 0.2 20.00%

Pipruit:
Wow, so, if we will totally utilize 1:500 leverage that is commonly provided now by different brokers, the bid/ask spread will be 1/5 of my start up assets. Say, if my capital 10,000 USD, then the bid/ask spread at any trade with 1:500 leverage will cost 2,000 USD?

Commander in Pips: Absolutely. So you can see that “fiscal death” and “leverage underestimation” are the same.

But to give you just hard rocking foundation of that statement, let’s turn to some numerical examples. I know you like them, don't you?

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Lasted edited by : May 4, 2012