Stop wasting pips! Strategies for cutting your trading costs

One of the most important aspects of any forex trading strategy is containing your trading costs, which helps ensure that you're squeezing the most profit out of every trade and aren't drawing down your funds with pointless trades and careless execution. Here are some of the common ways for you to waste your money while trading, all of which I've been guilty of at one time or another; how do you think I discovered them?

Forgetting to take the spread into account: seems obvious enough, but it's easy to forget that every time you place a trade you're paying the spread right up front, and if your trades have a narrow margin of success, a big chunk of your earnings is going to be eaten up by the spread. And if you're not executing your trades perfectly, that chunk is going to be even bigger. Another surefire way to get screwed by the spread is to take a trading strategy from a pair with a low spread, like the EUR/USD, and try to use it for a more exotic pair with a much larger spread. You may quickly find yourself spread way too thin. (Excuse the pun.)

Overtrading: maybe you get a great new trading idea every hour or so. Maybe you change your mind about a trade that seemed perfect at the time but isn't going the way you'd planned. Maybe you feel like getting into 5 different currencies at the same time, for no good reason other than you like variety. All of these undisciplined trades are going to burn up pips like wildfire, and in the long run are unlikely to repay you for those added costs.

Testing an unproven strategy with real trades: whether you've invented it yourself, gotten it out of a book, or found it on a web site, any trading system that you start using in the live forex market without prior backtesting and/or a trial run on a demo system is likely to cost you plenty of pips as you learn its idiosyncrasies and weaknesses the hard way. I lost a lot of money this way - for my first foray into forex, I just grabbed a trading system off the shelf (well, the Internet) and assumed it would work because lots of people seemed to be using it and had testimonials about it all over the web site. I started trading with this system after only a few hours of practice on a demo platform, and quickly discovered that I had no idea how to make it work consistently...except when it came to losing me pips, which it was great at.

Trading exotic pairs with a big spread just because you like the idea. This goes back to point 2 about forgetting the spread. If you're drawn to exotic pairs because you like dropping references to the Thai Baht or Polish Zloty in conversation, then do yourself a favor and just trade them with a demo account. Most people you try to impress with your exotic trading prowess won't know the difference, or care.

On the other hand, if you happen to have worked for the Central Bank of either of these countries and know the currency's behavior by heart, by all means, go right ahead and put real money on the line.

Combine trades whenever possible: don't take profits on a trade if there's a high likelihood you'll just be re-entering the market again in the same direction soon. (Unless your plan is to get out in anticipation of a big dip and then buy at the bottom.) If you don't expect dramatic changes, stay in the trade - you'll cut your spread costs in half. Do it again the next time you're tempted to jump in and out of the market, and you'll cut them by two-thirds. You get the idea. (This is probably just another way of saying don't overtrade.)

Compare spreads on different trading platforms: you may be able to save a pip or more in spread costs with a forex broker offering lower spreads. Even if you're just saving one pip on each trade, it'll add up - and if you're fortunate enough to rack up significant trading gains and begin placing larger and larger trades, that one pip savings could eventually be 5 pips a trade, 10 pips, 50 pips, and more. To the best of my knowledge, the broker offering the lowest spreads at the moment is Oanda, which has a mere 1.5 pip spread on the EUR/USD pair. Oanda will also let you place tiny trades of as low as a dollar, which leads me to my next point...

If you must trade an untested system with actual money, since demo trading just doesn't feel "real" enough (and yes, I know what you mean, there's nothing like real money to focus your attention), then start out placing tiny trades of under $10 with a broker like Oanda. This will allow you to feel like you're making (or losing) real money while preserving your funds and your sanity by reducing the size of your losses. It's a bit like playing the nickel slots at a casino to make your cash last longer - though hopefully the odds will be a lot better.

Finally, at the risk of repeating myself, the best way to save pips is to thoroughly test your trading system and then execute trades with consistency and discipline. Remember, the data is your friend, so treat it like one - spend lots of time with it, get to know it better, check in on it every day, and it may just pay you back handsomely.

Related topics:
Simplify Your Trading
Signs You May Be Overtrading