Fees can kill you!

Due to two disappointing trades recently I started thinking more about exits and returns. Are 3% or 4% a good return per trade? Should I aim higher, risk having to stay in a trade for longer and potentially suffer through a temporary downturn or eventual loss? What is the effect of trading fees on my returns?

So, I started playing with simple numbers using the following assumptions:

  • 3 trades per week
  • $1000 exposure per trade
  • round-trip for each trade completed within 1 week
  • 20 weeks monitoring period
  • 50% accuracy
  • -2% maximum loss (assuming disciplined exit for each losing trade … yeah, I know …)
  • $10 fee per round-trip

Further assuming a recurring pattern of 3%; 4%; -2%; -2% return every 4 trades, I get an average return per trade of 0.75%. This results in 15% gross and -5% (!) net return over 20 weeks on the $3000 that I keep re-investing each week. Here is the chart:

broker fees kill
Yellow: account balance gross; 15% growth on $3000. Orange: account balance net; 5% loss on $3000.

Then I adjusted the return pattern to 4%; 4%; -2%; -2% to get an average of 1.00% return per trade. In this scenario, this is the break-even point in the net account balance vs. 20% gross return.

break-even point
Yellow: account balance gross; 20% growth on $3000. Orange: account balance net; 0% change on $3000.

Finally, I took my papertrades and subtracted $10 fees per trade to get a more realistic chart. At this moment, I have an average return per trade of 1.05%, accuracy of ca. 40% and completed a total of 59 trades in about 5 months. Had I traded with $3000 as described above, my gross return would be 22%, with the net return being 2%.

paper trades
Yellow: account balance gross; 22% growth on $3000. Orange: account balance net; 2% growth on $3000.

To be honest, all this was quite a shock. Obviously, I was aware that fees reduce the profits I track in my spreadsheets. However, I’d never imagined the impact to be so pronounced. Even in my paper account I’m essentially just treading water.

Once I had chosen a broker, I didn’t pay too much attention on my fees because I thought I should first suss out how to trade and worry about costs later.¬† At this stage, just ending green is an accomplishment! But this little exercise got me thinking.

I’m sure there are formulas that calculate different scenarios and make suggestions on position size etc. I will probably go and look for them soon. One thing is certain, I have to rethink my approach and maybe see if I can find a cheaper reputable broker that accepts newbies.

No wonder many newbie traders fail.

Drawdown through fees doesn't only kill your account balance, but also your morale.Click To Tweet