Those who start trading get trapped in the claws of the Devil of over-trading. This is applicable both for traders who make profits and those who face losses. Day trading is like gambling, and once you start doing, you tend to over-trade.
The eyes of the devil of over-trading are especially on those traders who trade using leverage as this is the most lucrative option to make maximum profits. The brokers charge the traders a percentage of spread as a fee. Although traders think that this is the part of trading and a small cost for doing the business, it comes into the equation when they start making good profits and open and close positions rapidly.
Let’s understand this with an example:
Suppose, you have opened a leverage position, and here we are taking the most common leverage into account i.e. 200:1. This means you are depositing $50 for a $10,000 trade. So, for a trade like this, your broker will charge for a minimum three pips which mean $3. And in some exotic currencies, he even charges for more than 12 pips. Now, this is where the brokers are making money and stripping traders off their net profit! How? Check the following calculation:
Continuing with the above example: you have deposited $50 and your trader as charged you $3 for three pips (Remember, here we are taking minimum pips. The figure can go to 12 plus). This means your broker is making 6% (3/50 = 0.06) commission from what you are trading!!!
This is a major reason why brokers promote day trading a lot. Well, this is not a bad business if you get into one, but bad for traders and for those who over-trade. In fact, traders are convinced again and again to trade multiple sessions.
Well, the story does not end here. Along with charging a commission for the spread, the broker is also hedging against you because you will pay for brokerage also. I think, now your doubt has been vanished about why everybody wants to be a broker?
Slippage is one more problem when it comes to Forex. However, it is not as big as in other markets such as share market, but still, if the trade volume of a currency pair is small, it is a problem. Slippage is the difference between the price at which you wanted to pick a currency pair and the price at which you got it. Slippage is not a concern for long-term investors, but it is a big concern for day traders especially if they are trading in a pair which has less volume.
There is one more thing on which brokers promote the business of trading, and that is no tax. Although they are correct to some extent, the tax is not applicable for long-term investors and that also for investors who keep their money in the market for more than one year (or there is a minimal tax). But day traders’ profits are considered as their income and tax is applied on that. There is no reduction in tax as this is counted as your regular income and comes under the bracket of regular income tax. However, the laws are different in different countries, but just think how much tax you have to pay at the end of the financial year if you are making good profits! And of course, profit is what you stepped into the forex market for.
So, what is the best sword for this devil?
The only solution is to keep your eyes and ears open and be aware of the promotion of lucrative techniques and systems that promise maximum profit. Do careful calculations and check if spread commission, tax, and spillage are eating all your profits leaving you nothing at the end except for that happy feeling that you made profits. Better prefer long term trading to get the best tax-free results.
And this takes us to our next deadly devil – Believing the Outside Sources….