Commissions and day trading

D

dv4632

I think the most unsung reason for retail trader failure is... COMMISSIONS.

Let's say you pay $4.50 round trip and you're going to trade on average 10 ES contracts per trade. And on average you make 5 trades a day. So on average 25 trades a week, and 1300 trades a year.

Ok, so 1300 trades times $4.50 commission comes to $5850. But you're trading 10 contracts... so that makes it $58,500 a year in commissions!

Unless you really know your stuff, the cost of doing business will eventually erode all of your capital. Crunching the numbers for the first time was enough to turn me off the idea of being a frequent day trader. What a handicap to work with! Not trying to say it can't be done... but day trading is hard enough without a hurdle like this to overcome! If I'm a breakeven swing trader I'll end up with a net loss. If I'm a breakeven day trader I'll blow out my account.

I'm interested in what retail traders who trade for a living think about this. Am I over-reacting in any way? Anyone who has counter arguments I'd love to hear them. :)
 
10 contracts of es has a total value of over 650k dollars. I suspect that's bigger than your net worth, let alone your acct size.

Simple advice would be not to leverage up.
 
Once you break 500 contracts per month you can start looking into electronic. Before that point don't even bother to spend the time investigating it.

Quote from JamesL:

With that volume you can get electronic membership and cut your commissions in half
More...
 
Does a business owner who travels several times a year to market products/services at conferences, each of which generates on average a quarter million dollars in business worry that the $6000 cost of exhibiting at each conference will put him/her out of business?

If you do your market research and create a business plan for your trading, your commissions are just a minor cost of doing business.
 
Quote from dv4632:

Unless you really know your stuff, the cost of doing business will eventually erode all of your capital.
More...

Why would you trade 10 contracts unless you really know your stuff???
 
This is true. A lot of people don't consider the cost of commissions + spread. A beginner is lucky to have an edge @ 60% and 1.5R. Over-coming the cost of doing business is extremely difficult.

All things considered, you NEED to get as cheap as you can in this game. That's step 1 before anything else.
 
I agree with her assessment 100%. Businesses have expenses and when you do your numbers all that counts is what the bottom line is after expenses. There are few businesses in the world that can match the return on capital that a skilled trader can generate ... generate after paying his expenses which are predominately exchange fees and commissions.

In the struggle to get to break even and beyond they seem impossible to overcome but the same is true for a retailer getting his merchandising right in a high traffic location with a steep rent. Early on the nut is a killer but success changes all equations.


Quote from NoDoji:

Does a business owner who travels several times a year to market products/services at conferences, each of which generates on average a quarter million dollars in business worry that the $6000 cost of exhibiting at each conference will put him/her out of business?

If you do your market research and create a business plan for your trading, your commissions are just a minor cost of doing business.
More...
 
Thanks for the responses.

I just used 10 lots as an example. Obviously I'm not planning on trading that kind of size.

I guess the point I was making was that it's possible to have a true edge in the markets and still lose money. But as others have pointed out, that's no different than any other business. You can sell your product for more than you paid to produce it, but if that profit can't cover your costs of doing business then the business will fail.

I crunched some more numbers today and maybe I over-reacted a bit. Back to the 5 trades a day a $4.50/rt example.

You make 25 trades a week, costing you $112.50 in commission. So you only need to come out ahead by 2.25 ES pts to cover your commissions for the week and break even, this the same whether you're trading 1 lot or 10 lots. Anything above the 2.25 is profit. That isn't asking much for a skilled trader.
 
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