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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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  1. Administrator

    Administrator Just Administrator :-)

    Sep 24, 2007
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    Part II. Overleveraging and Transaction Costs. [​IMG]

    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, %
    1:14 pips = 0.00040.04%
    1:24 pips*2 = 0.00080.08%
    1:44 pips*4 = 0.00160.16%
    1:84 pips*8 = 0.00320.32%
    1:164 pips*16 = 0.00640.64%
    1:404 pips*40 = 0.01601.60%
    1:1004 pips*100 = 0.044.00%
    1:500 4 pips*500 = 0.220.00%

    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?
    #1 Administrator, Apr 26, 2012
    Lasted edited by : May 4, 2012
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