4th March, 2003
Transaction Costs eclipse profits|
Every once in a while, all of us need to halt and review our operations in order to find out mistakes that need to be corrected and also to identify strengths or correct practices that need to be enhanced or duplicate. This has nothing to do with the market.
Dr Van K Tharp (author of "Trade your way to Financial Freedom") says, "People make money in the markets by finding themselves, achieving their potential, and getting in tune with the market". As can be seen, in the first two activities, the spotlight is on oneself, rather than on the market. And yet, we spend almost 90% of our time being concerned about the market and devote only 10% of our time and effort (if not less) on studying ourselves.
Today, we try to identify one of the main reasons for our losses in February and in January.
In February we posted a loss of $1,185/- (-0.56%, unleveraged) on a capital amount of $210,235.09. We had undertaken 68 round trades in the various currency pairs in lots of 25K of the underlying currency, incurring an average cost of $33/- per 25K lot.
Net Loss..............................$ 1,185/-
(-) Transaction Cost ($33 x 68).......$ 2,244/-
= Gross Profit........................$ 1,059/-
It is seen that the Transaction Costs eclipse the Gross Trading Profit. There are two ways to move from Loss to Profit. The first is to increase the Gross Trading Profit. This is a constant ongoing effort. The second is to decrease the Transaction Costs.
Transaction Costs are made up of 10 pips on account of Brokerage and Slippage and 5 Pips on account of the Bid/ Offer Spread. It is not possible for us to reduce this Overhead Cost per Trade.
The only way to reduce Transaction Cost, therefore, would be to reduce the number of transactions. We would have achieved Break-Even for Feb if we had traded 35.9 Lots LESS (being $1185/33), or in other words, if we had undertaken only about half of the trades we actually undertook.
The figures for January are as follows:
Net Loss..............................$ 2,514/-
(-) Transaction Cost ($33 x 82).......$ 2,706/-
= Gross LOSS..........................$ 192/-
Although we made a Gross Trading Loss of $192/- in January, our Net Loss would have been lower if had been trading less. If we had only undertaken half the trades we actually undertook, our Net Loss for January would have been $1,161/-, instead of $2,514/-
The conclusion from the above is that we are Overtrading and have to reduce the number of our trades. How can that be done? By paying attention to 2 things:
1) Better Trade Selection
2) Trading on more longer time frames than we are currently trade
Both of the above call for greater levels of discipline.
The reason we are sharing these computations with you is that it needs to be recongnised that Trading is different from and much more difficult than Forecasting. Trading needs to be looked upon as a business. If you, Dear Reader, can learn from our mistakes (or from our successes), the purpose of "FX Thoughts for the Day" would have been served.
Your comments and feedback would be appreciated.
These views/ forecasts/ suggestions, though preferred
with the best of intentions, are based on our reading
of the market at the time of writing. They are subject
to change without notice. Though the information sources
are believed to be reliable, the information is not
guaranteed for accuracy. Those acting in the market
on the basis of these are themselves responsible for
any profits or losses that might occur, without recourse
to us. World financial markets, and especially the
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it is assumed that those who trade these markets are
fully aware of the risk of real loss involved.
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