# HOW DOES THE FOREX BROKER COMMISSION AFFECT THE PROFITABILITY OF THE STRATEGY? COUNT POINTS

Not all traders think, but the effectiveness of a trading strategy depends not only on its profitability but also on the commission of a forex broker. 25% of the deposit for 100 transactions – this may be the commission for a scalping strategy.

Having learned how to build trend lines and open deals, starting to delve into the jungle of fundamental analysis and technical figures of a trend reversal, each trader thinks about what kind of trading system to choose for himself.

From my own experience, I know that most novice traders are simply thirsty for action. They do not want to earn, they want to trade. Having closed one deal, they urgently open another. Therefore, many traders have formed the opinion that intraday trading is the most profitable.

Which of the trading systems is the most profitable – this is what we will find out today.

## “I CAME TO FOREX FOR MONEY …”

Approaching the choice of his trading system, the trader shovels a bunch of information-analytical reviews, trading recommendations, forex forecasts. He is trying to find the most effective indicators that give the most accurate trading signals. But, as the user of our forum Nuf says, “I came to Forex for money, and not be smart.”

It is financial costs, such as swaps, spreads and all kinds of commissions, that can easily turn a very good trading system into a loss-making one.

For example, take a trading system with the following conditions:

- Currency pair: euro / dollar;
- Acceptable risks: 1% of the deposit per transaction;
- Spread: 0.6 pips;
- Commission: 0.4 points;
- Slippage: 1.5 points;
- Swap: since we are not investors, but traders, we will not take this indicator into account to simplify the analysis.

Accordingly, the total value of our costs per transaction will be 2.5 points. How will this affect the effectiveness of our trading strategy?

### LONG TERM TRADING STRATEGY

In a long-term forex trading strategy, the approximate stop loss is about 250 points. If 250 points are 1% of the deposit, then, respectively, 2.5 points are 0.01% of the deposit. That is, 0.01% of the deposit is a loss from financial costs in each unprofitable transaction in addition to the loss from stop loss.

Is it a lot or a little? Count. For example, for 100 unprofitable transactions, losses from financial costs will amount to only 1%. Moreover, we are considering a long-term strategy, where the transaction lifetime is a month or more. Having completed 12 transactions during the year, of which 3 were unprofitable, you will lose only 0.03% of the deposit at costs.

We conclude: in a long-term forex trading strategy, financial costs do not significantly affect its effectiveness.

### SHORT TERM TRADING STRATEGY

For a short-term strategy, take a stop loss of 50 points. Accordingly, 2.5 points of financial costs will amount to 0.05% of additional losses from the deposit on each loss-making transaction.

Having received 100 losing trades, the trader will lose 5% of the deposit cost, which is already more noticeable.

At the same time, when trading according to a short-term strategy, the transaction lifetime does not exceed several days.

### SCALPING TRADING STRATEGY

When scalping, the size of stop-loss, on average, is about 10 points. Thus, 2.5 points of financial costs will be as much as 0.25% of additional losses from the deposit on each loss-making transaction.

100 unprofitable transactions will lead to a loss from financial costs of 25% of the deposit, which is very, very significant.

And scalping involves opening a large number of transactions every day, up to several hundred.

Even a rough analysis indicates that in terms of losses from financial costs, long-term trading is most effective.

## WHAT IS THE EFFECTIVENESS OF THE STRATEGY CAN RECOUP COSTS?

Of course, there will be critics who claim that there are quite profitable short-term, intraday and scalping strategies, the effectiveness (read, earned a profit) of which makes it easy to ignore all financial costs.

OK! Let’s try to figure out how effective a strategy should be, so as not only to cut costs but also to make a profit.

Imagine that we are in ideal conditions – there are no commissions, there is no spread or swap. Even when opening deals at random, with a take profit to stop loss ratio of 1: 1, you will statistically trade at breakeven – the ratio of profitable and loss-making transactions will tend to 50:50.

If you trade not at random but analyze the market and out of 100 completed transactions receive a loss of only 49, then with a large number of transactions, such a strategy will bring some profit. With the ratio of profitable trades / losing trades at 52/48, such a strategy will even allow you to earn money. But this is in a “sterile vacuum”, and any forex broker burdens us with the very same financial costs.

Let us return to the conditions described at the beginning of the article, adding to them the ratio of profit/risk as 1: 1. What effect will the trading strategies already consider by us show?

### LONG TERM TRADING STRATEGY

As we calculated earlier, 100 losing trades in a long-term strategy lead to additional losses of 1%. In order to recoup these costs, the minimum ratio of profitable to unprofitable transactions should be 52:48.

To earn beyond this (for example, 10% per 100 transactions), you need to increase efficiency to a ratio of 56:44. That is, 44 times we lose 1%, 56 times we earn 1% and 1% on costs, as a result, there will remain a profit of 11%.

### SHORT TERM TRADING STRATEGY

Returning to the previous calculations, we see that losses on costs amount to 5% of the deposit for 100 unprofitable transactions. To earn at least 10%, this strategy must be more effective than the long-term. If there are 53 profitable trades out of 100, then only the costs will be paid off. A ratio of 58:42 is enough to get an 11% profit after 100 transactions.

### SCALPING TRADING STRATEGY

The costs of this strategy are the largest – 25%. To recoup them, you need to open 63 profitable transactions out of 100. To earn 10%, you need to reach a ratio of 68:32.

## TO SUMMARIZE

What are our calculations talking about? Given the costs, the effectiveness of the trading strategy should be higher, while the smaller the stop loss, the greater the impact of costs on the results:

- for a long-term strategy with a stop loss of 250 points, it is enough to open 56 profitable transactions out of 100 in order to earn 10%;
- for the medium-term strategy – 58 profitable transactions out of 100.
- for scalping – 68 profitable trades out of 100.

Now you can clearly see for yourself that the more active the trading strategy and the smaller the stop loss size, the greater the financial costs have on the effectiveness of the trading strategy.