To be successful in trading in the longer term, it takes a well-rounded approach to the business. Regardless of the profits you are generating, expenses need to be minimized. That ends up equaling more cash in your pocket.
It’s easy to see profits, but expenses can be tricky. Brokers like to keep fees hidden as much as possible. Your job is to unveil them and bring them into the light. Let’s look at two of the most common expenses in trading.
Trading Fees – When I first started trading, I was paying $25 per trade! Since trading for equities has gone to zero for most trades, those who trade straight out without derivatives, like options, need worry less. Your cost to buy shares is zero. Yes, your broker has a way to still make money here with order flow, but the outright cost to you is close to zero. That’s the good news.
Those who trade options on equities have a contract fee. The fee is paid at the entrance and exit so they get you both ways. If you’re buying option spreads, butterflies, iron condors, and the rest, the contract fees start to pile on.
Your broker will list the fee per contract, say 75 cents, as their standard fee. If you buy one call option, you will pay $1.50 total to enter and exit the trade. Most just assume that is what must be paid. Here’s a little secret. It’s a suggestion.
Contract fees are negotiable. I have negotiated mine down and so can you. Inquire about your fees, and look around for better prices elsewhere. They don’t want to lose your business. This will save you hundreds of dollars, if not thousands, over a year.
Slippage Fees – This is a slimy term, but it represents what your trades execute based on the difference between the bid and ask price quoted. If the difference between the two is a few cents, I don’t worry about it. When you see large bid-ask spreads, stay on alert. This is where you can lose significant money, and your broker can gain an equivalent amount.
Option contracts can have very large spreads in the bid-ask, especially on lightly traded equities with few contracts being traded. The spreads on options cost up to 100 times more than buying stocks outright.
Always look at the volume of contracts trades in your selected option, listed as Open Interest. You don’t want to get into an option and personally own over 10% of the outstanding contracts. That would lead to a lot of difficulty exiting the trade. I’ve been there before. Trust me — it’s not fun.
Placing an order at the market will nearly guarantee you the worst entrance price. You remove this slippage by placing limit orders only. You are telling your broker I would like this trade but only at what my limit order says I will take it at. I will pass on anything else and wait for a better opportunity. Never chase!
By using negotiated rates and limit orders, you can significantly lighten up your trading expenses throughout the year. And that, of course, will lead to more money in “hip pocket national bank.” That is where the profits are!
Enuf said.