The risks and pitfalls for those approaching
Forex Trading for the first time are numerous. It is, in fact, a complex activity that requires managing often unpredictable dynamics, demanding sharp skills and a certain level of coolness. The chances of failing on the first attempt and losing money are high. Obviously, such probabilities can be minimized if one undertakes a serious training path before starting to trade.
However, the dangers do not only come from "visible" obstacles but also from certain dynamics that may initially go unnoticed, from hidden elements that can lead to very unpleasant consequences. The reference is to what we could define as the "
convenience trap". A particular eventuality, but not at all unlikely, and that above all can cause a vicious circle, or rather a kind of short circuit that interferes with the trader's abilities.
We discuss this in this article, first delving into the issue of costs, which in "recent" Forex Trading takes on significant connotations, explaining what the "trap" consists of and providing some advice to avoid it.
How much does Forex Trading cost
In the past, investing was the prerogative of those who possessed a certain amount of capital. Today, trading is within everyone's reach, more or less. The credit goes to the spread of digital technologies, but also to the willingness of brokers to open the doors of trading to ordinary people as well. Obviously, trading does not mean earning, but still: the possibility exists. The result is that
it really takes "a few euros" to start trading. But what are the costs for those who want to undertake an experience in Forex Trading? Rather, what are the cost items to check before making a decision?
First of all, it is necessary to look at the initial minimum deposit, that is, the minimum required by the broker to activate an account. This cost item should not be understood as a sort of subscription. It is not and could never be: brokers are based on a different economic model. Specifically, they earn through commissions and spreads. The meaning of commissions is known to everyone, while the
spread is less obvious. This term refers to the difference between the real market price and the price that the broker sets at the time of order execution. The difference, in fact, represents
the broker's source of earnings. Spreads should always be low and declared in advance.
Spreads and commissions are cost items that should be evaluated before starting Forex Trading. Some brokers require the payment of both commissions and spreads (for example, many bank brokers do),
some brokers only impose commissions (mainly
ECNs) while others limit themselves to
spreads (mainly market makers).
Also, pay attention to the "minimum trade", that is, the minimum possible exposure. When do I have to spend to execute an order? This is the question you should ask yourself. Generally, brokers offer lots. A lot refers to a class of assets or financial instruments, but the specific meaning and its use varies from market to market. The standard lot requires an investment of 100,000 euros, but there are submultiples, often with a base of ten: mini lots (0.10), micro lots (0.01), nano lots (0.001). Nano lots combined with leverage, which allows multiplying the effects of an exposure, essentially allow trading with a handful of euros.
What happens if you fall into the convenience trap
Generally speaking, the less you pay the better. This applies in all areas of life, including Forex Trading. It is desirable, in this case, to turn to a broker with a low initial minimum deposit, with reduced or even absent commissions, with accommodating spreads and so on. Yet this conviction, if not accompanied by a certain awareness of economic
and psychological dynamics, can represent a double-edged sword.
Well, first of all, a possibility must be considered, namely that behind a radical reduction in costs hides
a certain mediocrity of services. If it's too good to be true, then it's not true or
it's not that good after all. Take this possibility into consideration.
But even if the services were still up to the situation, the risks for the trader would not be over. In fact, they could still fall into the aforementioned convenience trap. This trap is above all
psychological.
Very simply, if a trader spends
too little to trade, they risk not doing
good trading. Imagine having opened an account with only 50 euros, thanks precisely to the broker's willingness to meet the trader, which resulted in an initial minimum deposit of only 50 euros.
So, you start trading with 50 euros, maybe investing 10 euros at a time. But what happens? Even if you were to make the trades,
you would earn a few euros. Not very satisfying, right? So you would be moved by the desire to increase your capital. Result:
you increase the exposure and the pace of trading, you place more orders per day, every time you can. In the end, a game that doesn't pay off, an imprudent approach to trading, driven by the rush and haste to earn. Here, in a short time, you lose a good part of your "capital".
Advice to avoid falling into the trap
What we have just described is in all respects a trap. That is, a dynamic that at first seems desirable, but in the end proves harmful. Obviously the responsibility does not lie with the brokers, who in the end exercise a right, that is, to modulate prices as they see fit.
It is up to the trader to avoid it. How to do it?
Well, the issue is quite simple. First, contextualize the numbers. Develop the awareness that cost items are important, in some cases very important, but not fundamental, not at all a priority when planning your trading experience. In short, give them the importance they deserve, without overdoing it.
Secondly, consider the opportunity to trade only when you can really afford it. That is, when you have a sufficiently large capital on your side. The issue is always the same, and concerns the expected earnings. Earning a 2% return from a trade with a daily time horizon is already an excellent result. However, it's one thing to talk about 2% on 1000 euros, another pair of sleeves
is 2% on 50 euros.
Obviously, the advice is not to tap into all your economic resources, all your savings. Quite the opposite: only spend what you can afford to lose. Dedicate to trading only excess money. But make sure it is substantial, perhaps by implementing a good accumulation program, if necessary slowing down your debut in the market.
This is certainly not an immediate approach, but one capable of expressing a certain balance between prudence and the need for returns. Certainly it is an approach that pays off more in the long run than the one that recalls "weddings organized with dried figs" (the proverb is really spot-on in this case). Certainly, it is the only one that allows you to avoid the insidious convenience trap.
