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Beyond a certain point, the commissions are irrelevant. If one's trading profits are low or marginal to the point where a change in commission rate would be significant, probably the trading is not going well. . And, as you intimated, I suspect this pertains to the vast majority of daytraders. To justify the time, expense, trouble and risk involved, one's daytrading profits should be way way greater than the commissions, whether they be in the range of $10, $20, or even $50.
Bill,
This comment reflects the conclusion you have expressed in several posts that effective trading, at least for yourself, is of the short term position trading variety. I'm sure your conclusion is well founded. Many people agree with you, and are doing well with that approach.
However, lots of newbie daytraders are being lured by the enormous profit potential of trading intraday for incremental profits- teenies, eighths, even quarters on a good trade, and as your post suggests, the 90% is probably full of such people. This note is from the point of view of that kind of short term trading, and expresses the view that "high" commissions can in fact lead to the "Something more than the commission rate is wrong"
Suppose my broker charges $25 per trade, plus fees for ECNs, SelectNet, SEC fees on sales, etc. Then the cost of a round trip is at least $50, and can go as high $80+ on 1000 shares, depending on your execution systems (Bidding/offering stock on some ECNs cost $0.015 per share). In rough terms, assuming you can afford to trade 1000 shares (things only get worse if you can't), to offset the cost of the trade you have to make 1/16. If you buy at the ask on a stock with a spread of only 1/16 you have to see the bid rise 1/8 just to be sure of breaking even, 3/16 to make a profit, 1/4 or more to help make up for the losses you took on the previous trade. If the spread is more, the bid has to move that much farther.
Last year I made a lot of trades, and paid around $55-60 on average per round trip. I averaged close to zero on the trades themselves as a rookie trader, which is probably not bad compared to other rookies. The experience cost me a lot of money. It's a common condition, and I find that credible advocates of daytrading acknowledge that a period of losing money for as much as 6 months or more while you are learning the "trade" is to be expected. If you cannot afford to lose the money, or the time to gain the experience, then you are destined to either make it by sheer luck, or join the growing ranks of daytrading losers.
You may find fault with the mentality, but you cannot dispute the numbers. The fact is, if you are trading for small fractions, commissions will eat you alive, and this has an adverse effect on HOW you trade! I can't count the number of times I lost money on a trade by getting out at a small loss after passing up the opportunity to get out with a 1/16 "profit", because taking the 1/6 would have been net zero, or even a small loss, or not taking a 1/8 "profit" because I knew that I had to average 1/8 to make any money, so I held out for a little bit more. I spent days committing myself to keeping from losing money, getting out flat, taking small losses never more that 1/8, not passing up on 1/6 or 1/8 that I had in the bag. At the end of the day, all I had to show for it was expensive commissions, and the memory of how many times I had gotten out of a position just before it went my way.
Now you may say that if the trades were free, I still would not have made any money, I just would have broken even. NO NO NO!! That misses the point!! If the trades had been free, or a lot cheaper, many of the losses I took on trades would have ended in small profits instead. I assure you that if the trades had been free, I would have made a LOT of money, trading for 1/16 or 1/8 profits a hundred or so times a day. It's not just the arithmetic, it's the effect the arithmetic has on your trading decisions that matters. Cheap commissions with reliable access would make a HUGE difference! |
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