In trading we have to pay the spread whenever we make a trade. In currency trading, now a days spreads have reduced a lot and on major pairs like EURUSD, GBPUSD etc brokers charge on average something like 1 pip. So whenever we make a trade, we have to pay 1 pip to the broker. This is how the brokers in general make their income. When the market becomes volatile the broker can charge a higher spread something like 2-10 pips. It depends but most of the time the spread on major pairs has been reduced to around 1 pip.
But you will be surprised. There are brokers that are still charging 2 pip spread for major currency pairs and 4 pip spread for minor currency pairs. If you are stuck up with such a broker than your trading cost will naturally be double that of a broker that is charging only 1 pip for the major pair. Now when the market is volatile, brokers increase the spread. So 1-2 pip spread that is charged on the major pairs is just an average figure. If you are into algo trading than you need a broker that has fixed spreads. When a broker gives you fixed spread, he will charge you some additional fee for that. Fixed spread is a good idea when you are doing algorithmic trading.
Now daily I open 2-3 trades. I have even opened sometimes 5-8 trades in a day. Sometimes I open a trade and when I see that I have opened the trade incorrectly, I close it for 1-2 pip profit or 5-6 pip loss. These trades are just like a cost to me. I have even made 10 trades in a day. Now if you are making 10 trades daily, in a week it means you are making 50 trades. Now I have very strict trading rules. I don’t open more than 3 trades in a day. Most of the time it is only 2 trades in a day.
The more you are going to open trades, higher will be your trading cost in the shape of spread. We professional traders take trading as a business. In a business, reducing cost is very important for a long term success. So first let’s see how much spreads are costing us. In the beginning when you are a new trader, you will be trading with 0.1 lot. Your trading cost will not be that much. But when you start increasing the number of lots your trading cost will start increasing.
How to make your Trading Plan?
Your trading plan is very important. You need to think it over again and again. A trading plan tells you how many trades you can open in a day. What is your target or goal that you want to achieve daily, weekly and monthly. What should be the stop loss? What should be the take profit.
This is my trading plan. I have a trading strategy that can make 100-150 pips with a 10 pip stop loss. I can make 4 trades in a day. In a week this means 20 trades. The take profit per trade is 110 pips and the stop loss is 10 pips. I need to just win 5 trades in 20 trades to achieve my target of 400 pips per week. If I win 5 trades, I am making 550 pips. Losing 15 trades means I will lose 150 pips so I will have a net profit of 400 pips in a week. So in essence I just need to win 5 trades in 20 trades which gives a winrate of 25%. I often come across trading strategies claiming 90% winrate. To tell you the truth asks any professional trader and he will tell you achieving even 50% winrate is hard. In nutshell this is what I am doing. Catching the big moves with a small stop loss. I can be wrong a number of times. My trading plan allows me to do that. If I lose a trade, I am confident I will win the next trade. So I don’t have to become nervous and anxious on losing 2-3 trades in a row.
Spread is a trading cost
Let’s calculate how much we pay to the broker in the shape of spreads. This is our trading cost. Suppose we are make 2 trades daily with 10 standard lot. This means 10 trades in a week. This is a simple example. If we pay 1 pip spread each time we trade, we are paying the broker \$100 for each trade. In a week we are paying the broker \$1K. In a month we are paying \$4K to the broker and in a year we are paying \$48K to the broker.
You are just payin \$48K to your broker for opening and closing trades. Now paying \$48K to the broker just to make trades is a substantial cost. What if we have a method that we can use to reduce this cost. Suppose if I can reduce this cost 50%. Reducing the cost 50% means saving \$24K. Saving \$24K is a huge deal. We can use this \$24K to pay for a new better and fast trading computer. We can spend this money on a very fast internet connection. We can renovate our trading office. So we can do a lot of things with this saving.
Now if we start trading with 20 lots, the trading cost will become \$96K. If we are trading with 30 lots, the trading cost will become \$144K. So you can see this cost will increase exponentially when we start trading with big lots. Now the question is how can we reduce the trading cost. You must have heard a lot about the IB also known as the Introducing Broker. IBs get rebate from the brokers for bringing in new clients. Premium Trading is IB for more than 50 brokers. When you signup for Premium Trading, you will be able to enter your existing broker with the Premium Trading account. When you connect your existing broker with the Premium Trading, just email them the IB reference number of Premium Trading and tell them to connect your trading account with this reference number. Once your broker tells you they have done it, your Premium Trading account will get linked with your broker account. You can just connect your existing broker with the Premium Trading account. With this simple connection you can save upto 80% on the spread that you pay to your broker. The saving will keep on adding in your premium trading account. There are multiple methods that you can use to withdraw the saved amount.
How much you save. It depends on the broker how much the broker is paying rebate to the IBs. Check the Premium Trading site and you will find the percentage of spread that you will get back. It can be upto 80% but it can be lower also depending on your broker.
Disclaimer: The Premium Trading link contains my affiliate link.