Stock Transaction Costs
Dramatically Reduce the Cost of Trading
By Trader Bob
Short Term Stock Trading, the Ultimate Source for Low Risk High Return Investing
Call: (702) 490 – 5317
For purposes of this discussion Stock Transaction Costs = Commission costs plus slippage. Commissions are what your broker charges you to execute a trade in and out or round- turn. Slippage is the difference between the price the system buys or sells at and the price you are actually filled at when your buy or sell order is executed.
OK, by now somebody has probably noticed that on the page, Stock Market Trading Today, I am not including any transaction costs for the computer generated trades posted on that page. The reasons for this are several:
1) The software does a poor job of calculating transaction costs for stocks and wants to calculate transaction costs for contracts rather than shares. 2) Commission costs are all over the place depending on the broker you use. In December, 2009 I know brokers charging 40 cents for a round-turn trade and I know brokers charging 50 DOLLARS for a round-turn trade. 3) Slippage can also vary wildly depending on the trader and the style of trading.
So let us first discuss style of trading. Our system, JORDI’s INTRA-DAY2, trades a lot and the average trade is small. For that reason we are not going to make much money if we cannot control our trading costs.
So first of all get a discount broker and don’t pay more than 4 dollars for a round-turn trade.
Trading Style – Many wannabe traders dream of making a living trading. But when I have talked to some of these people some balk at the idea of spending six and a half hours a day in front of a computer doing what they say they dream of doing! So let me start this discussion by saying that JORDI’s INTRA-DAY2 is not for everybody and it will not work unless you commit that time to sitting in front of your computer.
I sit in front of my computer dressed in pajamas and when the software tells me “market position has changed” I look at the chart and commit myself to making a market order to execute that trade. So I am calling this style of trading “Pajama Trading”.
I save tens of thousands of dollars every year by pajama trading. If I was lazy and placed my orders ahead of time and went to work, or fishing, all this money would go to my broker. You cannot trade "JORDI" unless you commit to pajama trading.
By the way I think pajamas are comfortable, but they are also, for me, a kind of uniform to be proud of. They symbolically represent my freedom from the 9 to 5 working stiff life style.
In any case if you are going to trade JORDI you are going to have to learn how to pajama trade.
Briefly this is why pajama trading works better than anything else and significantly reduces your stock transaction costs. The computer generates trades and you can see these numbers on your statistics screen and yes you can place those orders with your broker ahead of time and go fishing rather than sit in front of your computer. But basically there are two types of orders to place: stop orders and limit orders. A stop order triggers a market order when it is hit and a limit order means the order must be filled at that price or better.
This is the problem. Stop orders are almost always filled with some slippage even though it may only be a tick. But losing a tick on every trade will add up. If you lose $5 on every trade due to slippage and if you take 1000 trades in a year it means that extra tick is going to cost you $5,000 and that makes for an expensive fishing trip.
As for limit orders there are still problems. First of all you will never get BETTER than the limit price. But worse than that you will not be filled on some orders. And almost by definition the trades you are not filled on are the big money makers. Limit orders simply will not work.
So back to pajama trading. Why does it work and how does it lower stock transaction costs? Before discussing this further let me show you two examples of trades that were either entered or exited today, December 16, 2009. The first trade buying PALM was one we got out of:
OK you can see that this PALM trade really smells. The system bought PALM at the absolute high of the day. And if you had placed a stop order with your broker rest assured you would have been filled at the high of the day. But if you were pajama trading no matter how fast you were buying this stock at the market you would have gotten at least some POSITIVE slippage. If you decided to go to the bathroom before placing the trade you would have gotten even more POSITIVE slippage. If when you returned from the bathroom you decided that rather than place the order right away you would wait some more to see if the market comes back to your buy price you could have gotten massive POSITIVE slippage. These kinds of situations arise all the time when you are pajama trading and you have far more control with pajama trading than you do when you place a resting order with your broker.
The second trade buying Decode Genetic Inc. was one we got into and will not be exiting for another day or two:
This is a trade you do not want to fool around with and you need to jump on it and get into the market at any price just as fast as you can. And when you do you are going to have NEGATIVE slippage.
So how do you know when to take your time and when to jump on the trade? Well that is why you need to get a night job and spend 6 ˝ hours every day in front of your computer watching these trades unfold. You CAN learn to become skilled at order execution. Let the computer determine what market you buy, but you are the expert at getting in at the best price.
However the real point I wish to make here is that with pajama trading you can keep a significant percentage of your stock transaction costs. With pajama trading your net slippage numbers are a combination of NEGATIVE slippage and POSITIVE slippage and one can offset the other. But you will never get positive slippage by placing resting orders with your broker.
If you get really good at this you can trade with close to zero slippage. If you get really good at this you can all but eliminate stock transaction costs. But like everything else in life practice makes perfect. Learn to pajama trade; it is the key to making real profits in the stock market.
Finally if you are really considering attempting pajama trading you must read one more article. Please read Stock Trading Record Keeping.