4 Things New Traders Don’t Understand About Commission

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I couldn’t wait until I opened my first trading account like most traders. I still remember my first trade like it was yesterday, SINO. By accident I had gotten in SINO at around $6.20 for 100 shares. I only realized that my position filled about an hour later, and immediately i said “NO, I DON’T WANT TO BE IN”. There was 1 problem. Actually more than 1 problem, but the main problem was that my commissions were $10 per trade. So instead of getting out right away, I thought ” if i get out now, then i will automatically be down $10 dollars”. This leads to the first problem….

1) When A Broker Says $10 Dollars Per Trade, That means $10 dollars to Buy AND $10 Dollars to Sell.

I had no problem signing up with my broker initially because I thought “$10 dollars to buy and sell combined? Not Bad , not bad.” Wrong, Wrong, Wrong. In my personal opinion, I think they do this on purpose because they know new traders or investors interpret a “trade” as a full round trade, buy AND sell”. If someone said ” Ya, I took a trade on AAPL today” most of us will assume that the position is closed. It would be different if that person said ” Ya, I bought some AAPL shares today”. From this, you understand that the person most likely has not sold yet. However it is still the job of the trader to find out how their commission structure is set. There is always to find out before you ever have to place a trade.

Now some people might wonder, “well whats the problem with $10 dollar trade commission even if i’m OK with paying it?” Here is reason #2..

2) High Commissions Destroy Your gains, Your Capital, And Make your Losses Worse

I had to learn this the hard way. One day I went through all of my trades just to see my over losses and wins, but I decided to calculate my commission total as well. Why not right? Well Holy hell. I had only made about 29 full round trip trades (Buy + Sell=1 Round Trip) and my total commission I paid so far was almost $600 dollars!! On a $1000+ dollar account…. that is absolutely ridiculous!! Not only did I realize I was paying way too much to be a day trader, but it meant that anytime I just wanted to take $10-$15 dollars profit, i would end up with nothing, which is very frustrating. It also meant that if I lost money, you can go ahead and slap a $20 dollar commission loss on top of my trade loss. Paying these kinds of commissions are preparing you for failure as an active trader.

3) Not Being Able to Scale In and Out of Positions

A major advantage you will have as a trader is to throw out what some traders call a fishing order. So if I want to going into a stock with 500 shares but i’m not that certain just yet, I will often put in 150 shares, just to test the waters. This way if it turns against me, I have a smaller loss that if I had put in all 500 shares. And if the stock goes in your favor, then you can buy more shares to build your position. The problem is, this only can work if you have a much cheaper commission. Imagine try to build a position with a $10 per trade commission structure. If you split your 600 shares into 3 separate buys of 200 shares to scale in, it would cost you $30 dollars…no thank you. Also, what if you also wanted to scale out? The stock goes in your favor, and you want to take some shares off the table, and still leave a little bit just in case it continues to run. Just selling half your position now, and selling the rest later will cost you $20 dollars combined. So this entire trade, just commission, costed you $50 dollars. Not a good look.

4) Fear/Hesitation

One thing I learned after switching to a much cheaper broker is how much more free i was to jump in a stock right away If i liked the stock. I could do this because i wasn’t worried about paying an extra $20 dollars just in case I lost money on the trade, or break even. You see, when your commissions are high, you often hesitate your trades because you second guess and third guess them. The setup can be there, but you are worried about losing that extra money. You will often see opportunities pass by like I did, because I couldn’t just pull the trigger when it needed to be. What happens if you’re too early on your trade. You get in, take a loss, but your stock is still in play. You just need to re-enter. a trader with a smaller commission has way more freedom to go in and out of stocks because he/she isn’t severely penalized for it. It will be almost impossible to be an active trader with an expensive commission structure. Please do me a favor and search for a better broker that has cheaper commissions so that you are putting yourself in a position to win long term. You won’t regret it.

 

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