The cost of Forex is concentrated on spread. Spread is a commission paid to Forex companies, which is set for each currency the trader will bear when placing a sell or buy order.
For example, if the buy order is 100 yen for 1 dollar and the sell order is 110.005 yen for 1 dollar, the spread is 0.5 yen. Spreads are reflected in the rate, so traders do not have to pay separately.
Pay attention to the invisible cost
It is often said that spreads are important when choosing a Forex company, but if you value costs, it is dangerous to choose a broker only by looking at the spread. As Forex can have slippage, there is a risk that traders will be more likely to bear the cost more than spreads.
Slippage depends on the frequency of occurrence by a Forex company. Especially for Forex dealers with low contract power, there is a risk that excessive costs may be generated due to the risk to contract that the rate slips more than expectation.
Contract power and slippage
Contract power means the power the order pledges to the price as specified by the trader. For example, if the majority of orders are met as indicated, the broker can be described as with high contract power. However, it depends on the broker whether the order is established at the limit price. For example, there are brokers that contract 100 yen against exactly the limit of 100 yen, while others contract to 100.01 yen.
Although it is said that the level of the contract power is determined by the server processing capacity and order processing capacity of a Forex company. In the case of the above example, since the former Forex company is following the limit as ordered, while it can be judged as high, in the latter, the slippage of 1 sen have occurred and it is a broker with low agreement power. Because it slips for about 1 sen, it will result in a 100 yen decrease in profit or addition to loss per 10,000 currencies. Since it can be interpreted as extra cost, slippage has to be eliminated as much as possible.
It becomes an increase to trading costs
Forex companies with low contract power often cause slippage, which causes ineffective trading costs to increase. Suppose the order is contracted according to the limit, trading costs are only spread. However, in a Forex company with low contract power and slippages frequently occur, orders will not be established as indicated, it cannot make profits as much as you want and becomes a factor to increase loss.
How to check the contract power
You should avoid using a broker from concerns that cause trading costs to increase and with low contract power. Because it brings only disadvantages to traders, checking the contract power of each trader is essential.
So, what kind of means should the contract power be checked? There are also some Forex companies who are selling contract power. Unfortunately, there are limited ways to know the height of the contract. There is no way to check the server processing capability of a Forex company or check the company’s reputation. The stability of the system should also be considered, but even if it is a dealer with high contract power, since the risk of sudden system down is not zero, it is almost irrelevant to the contract power.
If it has the server ability to instantly sell out large quantities of trading orders, that Forex company can be judged with high contract power. However, slippage may occur when sudden market fluctuations occur, like the Swiss franc shock that occurred in the past. Be careful not to overestimate just because the contract power is high.
High contract power leads to profits
The trading cost of Forex is influenced by the high and low of the agreement power. If you trade with a supplier with low agreement power, you may be forced to pay more than the spread. It is important to use a dealer with high contract power. The higher contract power brings various merits to traders.
Over confidence is not allowed, but you should choose a dealer with a higher contract power than a narrower spread. Even a slight difference in the contract power may greatly influence future profits and losses. Check firmly the contract power of the broker when establishing an account.