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How Leverage Affects Transaction Costs PDF Print E-mail

Besides increasing the strength of your losses, leverage also has another way of killing you.  It’s a much slower kind of death, though, kind of like being continually occurring open to view to high levels of radiation. Most traders don’t see it coming till they are dead.


This killer I’m talking about is the combined transfer cost of using high leverage

Not only has the leverage increased the strength of your losses, it also increasing the strength of your transaction costs as a percentage of your account.
If you are losing in trades , your balance will shrinks and as your balance shrinks, your leverage increases. As your leverage increases, your transaction costs will eats away faster at the little money you have left. It’s a silence slow death we are talking about here.


The more your leverage, the more your transaction cost as a percentage of your balance.


If you have a mini account, and open a trade with a 5 pip spread, which equals $5 transaction cost, look at how the relative value of your transaction costs increases with more leverage.


Cost as % MR Leverage Margin Required (MR)
Cost as % MRLeverageMargin Required (MR)
.05% 1:1 $10,000
.10% 3:1 $3,300
.25% 5:1 $2,000
.5% 10:1 $1,000
1%20:1 $500
1.5% 33:1$330
2.5% 50:1$200
5% 100:1$100
10% 200:1$50

Now that you’ve learned how leverage can enlarge your profits and losses, and also your transaction costs.


Leverage doesn’t equal margin. How many times you can lever your account is the Leverage. How maximum you are allowed to lever is totally depending on your margin requirement.

 
 
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