Transaction overheads

[trendie]

What proportion of your trading is "lost" to transaction costs?

For example, if you are SBing, and the spread is 3 pips, then a 100 pip "profit" is actually 100 pips profit, and a cost of 3 pips.

This may not appear too much, but day-traders it might be a 30 pip profit, but the market had to move 33 pips for you to collect 30 pips. In which case you're paying 10% of the move as transaction charges.
For every trade completed, if you added 3 pips costs, how many pips would that be monthly/annually?

Similarly, if your trading spot, you have round-trip costs, etc.

Similarly, you could potentially have a successful strat, but the costs result in you being underwater.

If you treat your trading as a business, can you quantify the overheads?
Have you done this?

Would proportion of costs to trading would cause you to rethink your time-frame, and look at longer-TFs?
Or do you just accept the charges as a function of your trading?

 

[Rhody Trader]

This is a tricky one because if you're in a fixed spread (or effectively so) environment then there's nothing you can really do about it beyond trading smaller, and that only impacts the cost relative to your account, not relative to your trade P/L. It's not like commissions where you've got a sliding scale of cost relative to the size of your account that can really have a negative impact on returns for a small account. The only way to reduce your spread cost (assuming no position size change) is to a) opt for narrower spread markets, and/or b) try to work inside the spread if that is an option for the market you trade.

 

[Shakone]

What proportion of your trading is "lost" to transaction costs?

For example, if you are SBing, and the spread is 3 pips, then a 100 pip "profit" is actually 100 pips profit, and a cost of 3 pips.

This may not appear too much, but day-traders it might be a 30 pip profit, but the market had to move 33 pips for you to collect 30 pips. In which case you're paying 10% of the move as transaction charges.
For every trade completed, if you added 3 pips costs, how many pips would that be monthly/annually?

Similarly, if your trading spot, you have round-trip costs, etc.

Similarly, you could potentially have a successful strat, but the costs result in you being underwater.

If you treat your trading as a business, can you quantify the overheads?
Have you done this?

Would proportion of costs to trading would cause you to rethink your time-frame, and look at longer-TFs?
Or do you just accept the charges as a function of your trading?

I'd say this is probably the most important thing to do.

Assuming you're trading directionally and daytrading, you need to look at how much movement there is in a typical day, and compare that with the spread and other costs and find an instrument that is costing you as little as possible. This really is how I chose the things I would trade. First you have to overcome costs before you can get anywhere near being profitable. I don't think I could successfully day trade EURUSD with a spread of 3 pips. Even 2 pips would be very hard.

There's also the issue of getting filled on the bid, which is unlikely to happen in forex, so that's really another cost. I've seen people on the forum daytrading crude oil on IGIndex for example where the spread is about 5 - 7 ticks isn't it? And you can't get filled on the bid. You've really got no chance against someone trading on an exchange who can, and can see a spread of 2-3 at times.