Consider Transaction Costs before Executing a Day Trade

Day trading costs money. Consider all the costs of getting started: buying equipment, paying for Internet access, learning how to trade. Add to those costs the costs of doing business that vary with each transaction: commissions, fees, interest, the bid-ask spread, and taxes. You don’t make a profit on a trade unless it covers those costs.

Even if you work with a broker that charges little or no commission and even if your broker charges no interest on day trading margin (loans against your securities account), you can bet that your broker is making money off you.

That broker’s profit is showing up in the spread and the speed of execution, so there is a still a cost to arbitrage that must be covered, even on a seemingly free account. Trust me, brokerage firms are in business to make money, whether or not their customers do.

Add up those trading costs, and you can find yourself in a frustrating situation: You can see the opportunity staring you in the face, but you can’t take it. So the opportunity either sits there, taunting you, or it gets picked off by a trader who has lower costs than you do.

Does that mean you’re out of luck? Not at all. If you know what your costs are, you can avoid unprofitable opportunities and take advantage of profitable ones. When determining how much you have to clear, don’t consider your fixed costs, like your office and your equipment. (You have to cover them in the long run, but you can ignore them in the short run.)

Instead, figure out how much money you give to your broker on any given trade, on an order, per share, or per contract basis. Write that number down on a sticky note and put it on your monitor so that you remember what you have to clear before you risk a trade. Then don’t get so fixated on covering your costs that you avoid exiting trades at the right time.

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