What's consuming all your profits?

Fees are like taxes. We all hate them, but at the same time it's clear that we can't make a profit without them. In today's article, we'll have a look at all the things that reduce your potential returns when investing or trading in the financial markets.

Investing or trading is not free. You have to pay for services, and this is also true of forex trading (despite what some brokers will try to tell you otherwise). Whether it's visible or hidden fees or simply the money you "lose" in the actual trading, these additional costs must always be taken into account and you should know about them before you start investing/trading.

Fees (commissions)

Although there are many brokerage companies that promote forex trading as commission-free, you won't find anything like this at a reputable broker. The only brokers that will give you commission-free trades are market makers, but these are best avoided. This group of brokers has a conflict of interest, so they have no interest in their clients making a long-term profit.

Most of today's reputable brokers have trading fees (commissions) of around $3 per lot. In exceptional cases, you may then trade certain select groups of instruments without fees. Very often these are stocks or stock indices, in the case of FTMO, for example, they are also cryptocurrencies.

Watch out for the funding rate

When trading cryptocurrency futures, you should be careful if you are trading so-called perpetual futures contracts that do not have a settlement date. In these contracts, both parties pay each other a so-called funding rate. The amount of the rate depends on how high above or below the price the perpetual futures contract is trading compared to the market price of the underlying asset. The counterparties usually pay this amount to each other every eight hours, with the aim of keeping the price of the futures contract as close as possible to the market price of the underlying asset.

When the price of the contract is higher than the market price of the underlying asset, traders in a long position pay those who hold a short position and vice versa. These fees can be dangerous if the futures contract price experiences significant movements and the trader is trading with a lot of leverage.

Maker - taker fees

Some cryptocurrency exchanges also charge various fees for market orders and limit orders. In the maker-taker fee model, pending orders create liquidity (maker) and market orders receive this liquidity in the market (taker). Pending orders are thus charged lower amounts than market orders.

Swaps

Traders who keep positions open overnight on Forex must also take into account an additional fee in the form of a swap. The size of the swap is based on the interest rates of the central banks of the countries whose currencies you are trading. The bigger the difference in rates, the bigger the swap. It can be positive if you hold long positions in a currency with a higher interest rate, but in most cases it is negative because the amount is also affected by the costs of brokers or liquidity providers.

Slippage

Slippage can also be considered a form of fee. This is the difference between the expected price at which you plan to execute your trade (or profit/loss) and the actual price you will receive in your live account. You may encounter slippage in times of low liquidity in the markets, in times of increased volatility (for example, when important news is published), or when holding trades over the weekend (weekend gaps). Again, slippage can be both positive and negative.

However, it's not just fees and commissions that take away from your profits. Most of the lost profits are the fault of a large number of traders themselves. Trading may be a relatively simple activity, but making money in forex is not easy. Most traders go into trading with high expectations and the reality is a cold shower for them.

Backtesting and live trading

We don't need to talk about the importance of backtesting, without a tested strategy you should not try to trade at all. However, even backtesting doesn't necessarily mean that you will consistently make big money when trading on a live account. Many (especially beginner) traders make a few basic mistakes when backtesting, which can then cost them a lot of money in real trading.

The psychology factor

Then the psychology factor comes into play and it can play tricks on even the most experienced trader.

FOMO

One of the most common mistakes traders make is the fear of missing out, or FOMO. A trader who succumbs to this phenomenon enters trades unnecessarily early, without additional analysis or thought about entries and exits, usually at market price, without possibly waiting for the price to return to more interesting levels to enter.

Impulsive trades

Traders are also often unnecessarily impulsive, willing to enter into trades that are contrary to their strategy. This then naturally leads to further unnecessary losses and psychological pressure, which increases with additional trades that the trader realises in hindsight were wrong.

Distraction

Another factor that can steal a lot of your profits is trying to follow too many investment instruments. This then leads to you often overlooking an interesting setup in one of these markets. Then you try to make up for it by re-entering the market without enough preparation and at the market price, only to watch the price go the other way because you found out that the signal wasn't as good as you first thought in your haste.

Overtrading

Overtrading is also one of the vices most of you have experience with. The impression that the more trades you make, the more profit you will make is unfortunately wrong, and many traders only realise this when it is too late and their account is at zero. Even in trading, less is often more and quality should prevail over quantity.

Low win rate of trades

We've already written about the fact that high RRR is a nice thing at first glance, but it may not suit everyone. In fact, a high RRR can mean that you will make quite a lot of losing trades (low trade win rate), which can be mentally very challenging and exhausting. It doesn't have to be a bad strategy, and if you have tested it well, you can still make very interesting profits in the long run.

Unfortunately, many traders end up exiting their trades too early (without testing their new approach to exits). Thus, they leave most of the profits they could have made in the market and their RRR drops significantly. However, if at the same time there is no increase in the success rate of trades, this can mean unnecessary losses again in the long run. When you want to adjust your strategy, keep this in mind. Trade safe!