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From what I've seen as Editor of STOCKS & COMMODITIES, most traders have an idea that it is tough to make a living trading, but most refuse to add it up in black and white. The obstacles built into trading combine to make a very heavy load, irrespective of your decisions to get in or get out. So, to do you a favor, here's the bad news for the high-turnover set.
The first person you meet in a trade is also the first obstacle: your broker. Assuming you aren't a member of an exchange or a professional with super-cheap transaction costs, you're looking at $8 to $15 a stock trade, and conceivably much more. Ideally, you'd like to get that down to $1 per 100 shares; you just have to search and research until you find the price you need. No one's going to give it to you.
Then there's slippage: just getting the bid or the ask can be a hat trick at times. Especially with brokers who sell their order flow, the cost of the transaction and the support services in brokerages dictate that the money come from somewhere. The one that gets the least squawkage -- the fewest complaints -- is earning the spread -- your spread.
Then there's the liquidity at different levels. If you test your trading rules, you might think you can get trades off in the highs or lows of the price bar, but the trading in both areas is usually very thin -- close to nonexistent. You're more likely to be able to execute in the middle of the price range for the day, where most of the trading occurs. Of course, if the market is really moving, there may not have been any trades in the middle of that very long bar; it's just filled in for convenience as prices shoot through to new levels, up or down. In that case, your costs, in terms of your true positioning, skyrocket and the news is never good. Thus, your testing of trading rules can be very suspect.
If you survive all those problems, there's always the trading cash sitting in your account. The more that's there, the more you aren't earning interest on. Your cash cost is rising.
After that, there are the trading decisions you make. Not always perfect, are they? That's inevitable. But they reduce your take from the market's level -- when you could make the decision to simply own the market.
How about your operating costs? The Internet has lowered the price of fancy software and the prices of computing power and dataflow are falling rapidly, but there's still the cost of office overhead. Active traders usually scale up their overhead rather than keep it at the essentials. It's a burden in either form.
Finally, there are tax costs. Assuming you do make a profit, the government wants a chunk of it. Of course, Uncle Sam doesn't want a share of the losses. So, after you get past all the other hurdles, your invaluable trading capital gets debited by an unavoidable hit -- as much as 50% in some states and cities.
My point? Traders are too focused on the ins and outs of what they are watching instead of assembling all the alternatives and working through what would be the best operating conditions. Plus, once they settle into a routine, they rarely rethink all these aspects to trading. That can prove a costly, even fatal, mistake.
