Costs Matter

I made the following tweet on my stream today:


It’s often easy to misunderstand what is being said on Twitter so let me unpack these two tweets.  First, I tried to make a point to direct this toward active traders and people who are new.  What is active?  If you are day trading this post is directed at you rather than the trader that may hold positions for weeks or months at a time. I realize that there are plenty of medium/long-term trend followers (or whatever countless other strategies that are “low-frequency” in nature)  out there that might do something like 400 round turns per million per year in which case commissions/trading costs, while still important, are probably not nearly as critical as they might be for an active trader that is operating intraday constantly working in and out of positions each day with considerable volume.       I had also assumed when putting out my tweet that anyone that is actively engaging in short-term trading that has been around for a while has already discovered how important costs are to their trading hence the reason for me tweeting “If you’re new”.

Why do I say anything on Twitter about this?  I did this because I keep listening to futures traders that are active intraday being interviewed on various programs and the topic of costs virtually never comes up.  They are asked about their background, trading methods/style, exits, psychology, and so on.  Discussion about costs with these types of traders is almost never mentioned though.  For whatever reason those other things are considered standard questions for an interview with active traders but costs are not.  For the people who are trying to make a career out of this that are active in this manner but haven’t really considered costs you are going to need to do so sooner rather than later.

I’m going to use Don Miller, a veteran trader many of you may be familiar with, to make my point.  Years ago Mr. Miller did a series of YouTube videos called Trading After Dark which I think are great.  If you haven’t ever seen them I would encourage you to check them out.   For this post I’m going to focus on episode 6.  Here is a visual he used during this episode:



Definitions for this visual are as follows:

Revenue:  Gross amount of gain from a trade sequence (going from flat to flat)

Expenses:  Trade sequences that result in a draw or a loss.  These do not include commissions/his trading costs.

Early in the video Mr. Miller makes a point to discuss CME membership and costs of execution.  Why would he make a point of saying something about that?  Well, lets say that in some unicorn existing fantasy world you are Johnny New Trader and you watched these Trading After Dark videos and you decide you wanna be you wanna be like Don and you will replicate him right from the jump.  You like this idea because look at that visual….after his losses he was +$65,070 for the week!  Not too shabby right?  You probably haven’t done what he told you to do in the video (calculate your own costs see if this works for you) because you are too excited to get started.

So you, Johnny New Trader that hasn’t considered your costs, goes to TradeStation and sets up an account and you trade 7,394 contracts (what he’s referring to as cards in the visual above) of ES your first week and lets just assume by some miracle that first week of trading you match the performance that he’s got here.  You just made $65k right?  Wrong…..  because costs.

Currently at TradeStation your basic retail fee for an ES contract is $4.38 per turn.  This includes exchange and clearing fees plus the NFA fees so I’m quoting an all-in cost here and of course this will vary from broker to broker but most retail traders will likely be in the ballpark of this price point.  So…total costs to do what Mr. Miller did here as a regular retail trader:  ~$34,000.   Subtract that from your gross gain and now consider you are going to pay taxes too before you get to hang on to what is left assuming you make any money.  Are you doing trading for an income/as a job?  What happens when you go into a drawdown with such a cost structure?  How fast will you deplete your account during a drawdown if you are taking capital out for income while eating these sort of costs?  Can you even survive a drawdown?

This was the point of my tweets.  New traders must think about these costs and what it means to their bottom line and how it will impact whatever strategy they’ve decided to implement.  If you are a short-term focused trader and are very active on a day-to-day basis it is critical you to begin to think about this now even if you are still simply focused on trying become profitable/achieve positive expectancy as a trader.


DM Blog Link

CME Fee Schedule


EDIT:  I made an error in this post that was pointed to me thanks to Matt Herzog @mattth.  I doubled the number of contracts traded in this example so the costs I’m showing here for the comparable retail trader are wrong.  The actual number of round turns is 3,697 for the week shown in the image above.  As such, in the example I’m giving the retail trader at TS would have paid $16,192.86 that week for trading costs.

Does this change the point I’m making here?  No.  The typical retail trader out there is not likely to overcome those sort of costs without exploring lower fees, a lease, or purchasing a seat.  Consider that a trader doing this just 40 weeks a year has nearly $650,000 in overhead trading expenses when Jan 1 rolls around.  Even for an experienced trader that’s certainly a challenge but here I’m primarily suggesting in this post that the new trader not considering this while only trading in tight price ranges moving in and out of positions all day has almost no chance of survival as a result of these costs.

Thanks for correcting me on this one, Matt!



About Fat F1nger

Full time futures trader.
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