Here is a recent post I poached from the Power Dip System blog. It obviously applies to the Power Dip, but the implications can be extrapolated to any trader, either discretionary or mechanical, with a smaller account.
It could be considered in conjunction with this previous post I wrote about commissions: Commission Structures and Small Accounts.
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Lets take two hypothetical traders- both with 25K accounts.
Trader A uses a brokerage offering a per-share commission structure of .01/share.
Trader B uses a brokerage offering a per-trade commission structure of 7.00/trade.
We will assume both started trading the Power Dip System on 1/1/2009 and closed all their open trades today. They will have used the baseline model of 1% risk and 10% stop.
Note the differences in the key metrics such as annual return and average trade.
Fixed commissions have shaved over 30% off the average trade.
Commissions are a cost of business. Just like any business costs, if they are too high, they will put you out of business. Trading is a business, and as such, the cost of commissions should not be ignored.
In this study, per-share commissions are superior. However, if these same accounts were to compound over the next decade, eventually per-trade commissions will out-perform per-share commissions as the system starts purchasing very large (many shares) positions.
Where would you think the intersection is then?
Saving money is just as important as making it
Mr. Thaler, that would be an excellent project for you engineer types 😉
It depends on account size and the size of the average position, and how expensive the average share is.
I have made 8000 plus trades this year, a typical trade being
1000 shares at 25. Fidelity charges me eight bucks each way.
I do NOT day trade – I am looking for 40 cents to a buck
profit on a trade, and my average hold time is over a week.
$8 doesn’t seem like much but that commission adds up to
over $64,000 annually, which is a quarter of my profit.
The way I try to save money is do a trade for a penny a share
in my favor in and out. That covers the commissions and then some.
In my opinion, smart limit orders are far more important
than commissions.
re: smart limit orders- does Fidelity give a rebate for adding liquidity?
My trading volume is a freckle on Fidelity’s ass. They probably
consider me a fuckin’ nuisance.
Generational- I’m with Fidelity too and I’ve negotiated down to $6 a trade, I make about 1000 in a year. Speak to a supervisor and ask, can’t hurt.
GL
(laughter) please now, Mr. ‘Shedder, I’m a mathematician, not a dirty ME, (joking, of course, Mr. President).
lol…That is only a minor distinction for us liberal arts majors…But I’ve been reformed.
I may work on a spreadsheet to tackle this problem. It is an interesting problem. Warn me Mr. Thaler if you choose to take it on, as your math skills are much better than mine, as I observed during your recent exercise in oil carrying costs.
Actually, looking back, I can’t remember if it was the President or The_Real_Hmmm that said they were an engineer.
It would be easy, of course, just to apply your average annual returns to natural equations and then find the intersection; that’s just nice algebra.
However, looking at that lovely data you have, I’m now curious if maybe it would be better to express the form in probability. I noticed that both of those screens executed the same number of trades. Will that always occur, or is it a coincidence?
If your choice between a flat rate or unit rate affects the criteria of the system then their behavior would function differently. Consequently, if you should ever look to modify the system, that may be an interesting venue to venture down.
Oh, gotcha, I am no ME, so ’twas not me.
I am cerebral, but not at the expense of instincts.
What’s an ME?
Mechanical Engineer
Wood,
This sort of seems like a question for you.
For most of my short novice trading career, I’ve been trading the s&p only with the Profunds blpix.
Shortly, I plan to start trading the Profunds sector funds, with the general idea of either following trends or buying dips.
However, as I look forward to this new experience, I’ve noticed that the various sector funds can be priced anywhere from 8 dollars to 50 dollars and seem to vary greatly in the amount they fluctuate. That is, some have moved as much as 5% to 10% on ocassion per day.
So the question is:
If I decide to trade, e.g., 10 different funds, how would I determine how many dollars to allocate each fund? Certainly, I would not want to allocate the same dollar amount to a 10 dollar priced fund as a 50 dollar priced one.
Also, these sector funds move at 1.5 times the underlying securities.
So is there a formula or a really slick way to figure this out?
Sorry for being such a beginner.
Hawaii, I’m not certain that I understand.
How many of these do you plan to own at one time? 5? 10? Just divide your account equity equally among your total expected positions. 10 positions? 10% each position.
What I *think* is the true issue is that some of these move more in a day than others. For example, you are feeling that you don’t want the same amount of $$$ in a fund that moves 10% a day as one that moves 2%. If this is the issue, let me know. I have a solution for you.
Exactly,
I want the risk reward ratio to be roughly the same, so if a stock move 10% in the wrong direction, I’m thinking it makes sense to have proportionally less money in it, or does it cause I guess it could also move in the right direction?
Anyway, I can probably figure this here out for myself, but thought you might be able to do it in your sleep.
Hawaii, I thought that is what you were needing. I already wrote a post for you, in anticipation that that was the issue…well, sort of…I also wrote it to help new members of the PDS deal with ATR position sizing.
http://ibankcoin.com/woodshedderblog/2009/12/23/atr-position-sizing-and-stops/