Spread (commission) + Slippage + Taxes = Mediocrity
Each trade you enter generates spread revenue for the broker. This erodes your net profit. Many traders convince themselves that the spread is an irrelevant cost of doing business, but in fact it quickly becomes a significant part of your trading equation. If you trade retail FOREX at 200:1 leverage (pretty standard leverage), you put up $50 of margin to control a $10,000 mini lot. For this privilege, the broker will charge you at minimum a 3 pip spread on the major currency pairs, and up to 12 or more for some more exotic pairs. Those 3 pips (minimum) have a dollar value of around $3. In other words, the broker has just charged you a 6% commission on the actual money traded (3 / 50 = 0.06). Not bad business if you can get it. It’s little wonder that brokers and educators alike promote short term day-trading systems which encourage you to take multiple trades a session – they make 6% return on each transaction. Add to this the idea that the broker hedges against you each time, and it’s no wonder everyone wants to be a broker!
Slippage is a problem more common to stocks and other markets, but it can be an issue in FOREX as well. Simply put, slippage is the difference between where you wanted to get into the trade, and where you actually got into the trade. Because of the huge volumes traded daily in the FOREX, slippage should not be an issue. If you are continually getting re-quotes or slippage from your broker, change brokers!
14 The 7 Deadly Sins Of FOREX (And How To Avoid Them)Tax is an issue that is rarely addressed in FOREX, and with good reason; most people lose money, so at best they’re dealing with deductions, not income. That being said, assuming that you are making profit in the market (it is possible, we can show you how) the way in which you trade or invest becomes important. Did you know, for example, that short-term day trading is often treated as earned income? In other words, the income does not get to benefit from any of the reduced tax rates applied to investment income, and is instead taxed at your specific tax rate. This can make a huge difference in your final tax bill.
Longer-term positions, by contrast, are typically treated as investment holdings, and will be treated as long-term capital gains, and only when you sell. Although short-term and long-term traders may both end up with an equal number of pips of profit at year’s end, the long-term trader will take home a much larger amount due to this tax treatment.
The specific tax laws will vary from country to country and state to state, so please consult an accountant or tax lawyer for specific advice. 15 The 7 Deadly Sins Of FOREX (And How To Avoid Them)