Forex

Most traders
neglect them, but if you add them up, you’re likely to find that your
broker ends up with much of your profit.
A brokerage firm may charge about $20 to buy or sell up to 5,000
shares. If you have a $20,000 account and buy 200 shares of a $100
stock, the commission of $20 comes to one-tenth of one percent. When
you sell those shares and pay another commission, the cost of brokerage
rises to approximately two-tenths of one percent of your equity.
Trade like that once a week, and at the end of the month your broker
will have earned one percent of your account, regardless of whether you
made money. Keep going like that for a year, and your commission cost
will rise to 12% of your equity. That’s a lot of money. Professional money
managers are happy with 25% annual returns, year after year. They could
not generate them if they had to pay 12% annually in commissions.
But wait, it gets worse.
Look at a small trader who can afford only 100 shares of a $20 stock.
His purchase price is $2,000, but he pays the same $20 commission, which
eats up a whopping 1 percent of his equity. When he closes that trade and
pays another commission, he is 2 percent behind the game. If he trades
like that once a week, by the end of the month his commissions will
come to 10% of his account, more than 100% on annualized basis. The
great George Soros averages 29% annual gain. He could have never
accomplished that if he had to jump over a 100% commission barrier.
The bigger your account, the smaller the percentage eaten by commissions
and the lower your barrier to winning. Having a large account
is a great advantage, but whatever your size, do not be hyperactive.
Each trade and each seemingly cheap commission raise the barrier to
your success. Design a system that doesn’t trade very often.
I’ve met futures traders who paid $80 roundtrip commissions to fullservice
brokers. That was the price of allegedly sage advice, but any disinterested
professional will tell you that a futures trader who pays $80
round trip has no chance of winning. Why do people pay such exorbitant
rates? Because the little lamb who ventures into a dark forest is so
afraid of the big bad wolf, the professional trader, that he hires himself
a protector to guide him, a full-service broker. Once you do the math,
it becomes clear that you’re better off taking your chances on the wolf
than signing up for a guaranteed skinning by your protector.
There are full-service brokers whose advice is worth the money.
They bring good tips, get good fills, and their commissions are not
exorbitant. The catch is that they only accept very large accounts that
generate a high volume of business. Bring them a million-dollar account
with a history of active trading, and you may get their attention.
If you have an account in five or six figures and trade only a couple
of times a week, do not waste your time and money looking for
false security of an expensive broker. Get a cheap, reliable, no-frills
broker that you can easily reach via the Internet or on the phone—and
start looking for good trades.