To: Vitas who wrote (4639 ) 1/25/1999 2:41:00 AM From: michael r potter Respond to
Good post, thanks. Let's expand upon one of the reasons day traders face such an uphill struggle, which many lose. It involves costs. Many traders think only of the $16 round trip commission which seems inconsequential on large trades. It is the hidden cost times the frequency that exacts a terrible toll. A hypothetical will illustrate. EX. $100,000 acct. A day trader makes two trades on average of 1000 sh. at $50 each every other day. Every trade is done with a 1/8 spread--$50 bid, 50 1/8 ask. 1000 sh. @ 1/8 = $125, or a total round trip cost of $125 + $16 =$141. If the account is turned over every other day, [not unusual for some] and there are app. 240 trading days a year, the "real commission" is 240 round trips per yr. or 240 X $141=$33,840. The trader in this example has to do around 34% to break even. If one is shooting for net gains year after year of, pick a number-say 30% then the trader must have gross gains of 64%. to achieve the goal. Mighty tough over time. [Most fund managers would have little hope of beating the averages if they started off with a 3% or 4% handicap each year]. If one thinks these hypothetical turnover numbers are high, one should also consider that trading only 1/8 pt. spreads on $50 securities [or the equivalent] is not always possible. If the security is $25 with a 1/8 spread, then the game gets tougher. If one deals with options in the $3 to $12 range, that 1/8 takes a huge % bite with frequency. If the above example seems unrealistic, the point is that one should always do as Mr. Downs suggests and ruthlessly analyze and keep track of all costs [get them on paper!], and like any successful businessman, act appropriately. It also illustrates why, with increasing turnover, the level of expertise must be correspondingly higher to get the same result--at some point, unrealistically so [know thy self]. Successful trading/investing to all. Mike
