The Impact of Leverage on Transaction Costs

Leverage has another way of killing you besides magnifying your losses.

However, it's a lot more gradual death, similar to dying by a thousand cuts.

The majority of forex traders don't see it coming, and by the time they do, it's too late.

The related transaction expenses of using large leverage are the killer we're talking about.

Leverage not only magnifies your losses, but it also magnifies your transaction fees as a percentage of your account balance.

Let's say you deposit $500 into a small account.

You purchase five $10k micro GBP/USD lots with a 5 pip spread. You have a 100:1 genuine leverage ($50,000 total mini lots / $500 account).

However, you paid a total of $25 in transaction expenses (($1/pip x 5 pip spread) x 5 lots).

That's 5% of your total balance!

You're already down 5% with just one deal, and the market isn't even moving yet! If you lose all of your trades, your account balance will decrease.

Your leverage grows as your account balance decreases.

The more leverage you have, the faster your transaction expenses eat into any cash you have left.

This is the silent and slow killer I'm referring to.

Your transaction cost as a proportion of your trading capital rises as your leverage rises.

This is why one of the six most significant criteria to consider when selecting a broker is transaction fees.

Look at how the relative value of your transaction costs increases with more leverage if you go long 10,000 units of EUR？USD with a 5-pip spread, which equals $5 transaction cost.

You've now seen how leverage can increase your earnings and losses while also increasing your transaction costs.

Margin is not the same as leverage.

Leverage refers to how many times your entire account has been leveraged.

The maximum amount you can leverage is determined by your margin need.