When designing a forex trading system there’s so much to choose from. Where do you start?
One big important factor is to choose which timeframe to trade and there’s lot’s to consider.
I’m sure we’ve all seen other forex traders we’d like to follow in the footsteps of.
Depending on your personality you may be seduced by the excitement of a trading room where they trade live with someone calling the shots and putting their prowess on show. It looks so damn easy!
Or you’re enticed by the promise of trading in 10 minutes or half an hour a day. Dream on baby, it takes a lot more than that kind of commitment to be any good at forex trading or anything else worthwhile for that matter.
But let’s get down to reality. What’s a major consideration you need to take into account to have a good chance at success?
The First Forex Hurdle to Jump
The first hurdle to jump is the spread; the hidden cost to trade. Let’s take a look.
Charts are almost always bid charts or the cost to sell. When we buy we pay a higher price being the chart price plus the spread. When we sell we pay the sell price or chart price.
Sometimes we buy first, and then sell, if we want to gain on an upward move. Other times we sell first, then buy to get out, if we want to gain on the way down. No matter what, its buy low, sell high that we’re after.
Charts look the same no matter what timeframe it is. This chart could be in minutes, hours, days, weeks or months. We can’t tell without a scale.
But there’s a big difference in the result. The smaller the timeframe the smaller the number of pips our trade is likely to be between our entry and our stop. The travel distance the foreign exchange pair has to go to make the same amount of money, assuming the same amount is risked, becomes a lot further the larger the timeframe.
No matter what timeframe we trade, the spread in pips stays the same.
Let’s take a look comparing the trade distance between entry and stop loss in pips excluding the spread, with the spread cost.
What does this mean for trading forex?
The smaller the timeframe the greater the spread cost is to overcome before you become profitable.
Of course your broker will love you on small timeframes because your position size will be larger assuming the same monetary amount is risked. They’ll make money if you win or lose. It’ll be more because they’re getting a larger percentage of your risk per trade on small timeframes. That’s great if you’re trading to get an invite to the brokers Christmas party, but maybe not if you’re trading for the money.
Spreads can vary widely
Every forex pair is not created equal. Spreads can vary greatly.
Of course the majors like EURUSD, AUDUSD have very low spreads but spreads do creep up when you start to trade the forex cross pairs.
The volatility and fluctuations in the more boutique crosses can increase greatly. This can help get you killed in a trade. Try watching GBPNZD during a major session, then shortly after the US rollover and again at the weekend close. This spread volatility and expansion may take you out of a trade and cost you dearly, even if you have the direction right.
The lower the timeframe the bigger the bite the spread is. The lower the timeframe the fewer foreign currency pairs are viable trades.
Which timeframe is right for you? That depends on many factors, but remember, a higher timeframe will pay you earlier, rather than your broker, everything else being equal.
And that’s not all. Some accounts have a commission too. But when the commission is there, the spread is often reduced.
Let’s get thinking:
- What timeframe(s) do you trade?
- Do you make more than your broker over time?
- How much does the broker make from your trading?
- Are you able to claim some of your broker’s earnings for yourself by choosing another timeframe?