Your broker may not have decided to tell you, if you are a short term frequent trader, how commissions affect your account.  You probably won’t see articles put out by the industry either.  One of the most popular sites on the internet that has over 20,000 visits (and over 200,000 page views per day) provides the following statistics based on averages reported by their trader/subscribers:

We can see from the table above that a large percentage of these traders are making more than 6 trades per day, or better than 120 trades per month.  This is a rough guess, of course, but we can get an idea from this, what is going on out there in general; the brokers are making a killing.

Let’s analyze the effect of a hypothetical trader, Tom,  who has a commission rate of $6 per round turn, trades 6 times per day and see what kinds of forces influence his bottom line.

When you take a position in the market, whether you know it or not, you are spending a minimum of one tick in the bid-ask spread.  On the Emini contracts, this equates to $12.50.  When you exit the position, you pay the same minimum $12.50 plus $6.00 commission.  This total minimum expense comes to $31.00 per round turn and assumes no other slippage (which could actually be unreasonable but we’ll let that slide for now).  Now Tom is young, strong, educated, smart and motivated to succeed in his new-found career of trading the Eminis.  He is living the dream, so no problem, right?

But, let’s take a look at it from a little bigger perspective. Tom is devoting $3720.00 per month to expenses in terms of the Emini market.  The fact is, from the website statistics above, that 63% of the respondents traded more than 6 trades per day.  Imagine how much successful trading Tom has to do to recapture his $3750.00 each month, not to mention the risk it has added to his account…

If Tom is trading a $5000.00 account like many of the people I talk to on a daily basis, he is spending 74% of his account monthly in trading expenses. Tom may be having a heck of a good time, but there is a good chance he will not be trading in the very near future.  That is because his account exposure is much too high to sustain successfully for any length of time.  This is especially true when you consider that Tom many not be a better than break even trader.

The fact is, for Tom to be successful with this level of trading he should either have a much larger account for this amount of trading, or he should be trading a lot less or both.  Living your dream is a wonderful thing.  If everyone in the world truly did this, the world would be an incredible place.  Don’t forget to quantify the implicit things in the process of it all that can keep you from succeeding.