How does the broker's commission affect the profitability of the strategy? Counting points
Having learned how to draw trend lines and open deals, and having started to penetrate into the jungle of fundamental analysis and technical trend reversal figures, every trader thinks about which trading system to choose for himself.
I know from my own experience that most novice traders are just hungry for action. They do not want to earn, they want to trade. Having closed one trade, they urgently open another. That is why many traders have formed the opinion that intraday trading is the most profitable.
Which trading system is the most profitable - that's what we will find out today.
"I came for the money..."
In approaching the choice of your trading systemThe trader digs through a lot of information - analytical reviews, trading recommendations, forecasts. He tries to find the most effective indicators that give the most accurate trading signals. But as the user says of our forum Nuf, "I'm here for the money, not to be smart.
It is the financial costs, such as swap, spread and all sorts of commissions, that can easily turn a very good trading system into a losing one.
For example, let's take a trading system with the following conditions:
- Currency pair: euro/dollar;
- Allowed risks: 1% of the deposit per trade;
- Spread: 0.6 points;
- Commission: 0.4 points;
- Slippage: 1.5 points;
- Swap: since we are not investors, but traders, we will not consider this indicator to simplify the analysis.
Accordingly, our total cost per trade will be 2.5 pips. How will this affect the effectiveness of our trading strategy?
Long term trading strategy
In a long-term trading strategy, the approximate size of a stop loss is about 250 pips. If 250 pips is 1% of the deposit, then accordingly 2.5 pips is 0.01% of the deposit. That is, 0.01% of the deposit is a loss on each losing trade in addition to the loss on the stop loss.
Is that a lot or a little? Let's do the math. For example, for 100 unprofitable trades, losses from the financial costs will be only 1%. Especially since we are considering a long-term strategy, where the lifetime of the transaction is a month or more. Making 12 trades in a year, of which 3 were losing, on the costs you will lose only 0.03% of the deposit.
ConclusionIn a long-term trading strategy, financial costs do not have a significant impact on its effectiveness.
Short-term trading strategy
For a short-term strategy, let's take a stop loss of 50 pips. Accordingly, 2.5 points of financial costs will already be 0.05% additional losses from the deposit on each losing trade.
After getting 100 losing trades, the trader will lose 5% of the deposit, which is already more tangible.
In this case, when trading on a short-term strategy, the lifetime of the transaction does not exceed a few days.
Trading strategy for scalping
In scalping, the size of a stop-loss, on average, is about 10 pips. Thus, 2.5 points of financial costs will be as much as 0.25% of additional losses from the deposit on each losing trade.
100 losing trades will result in a loss of 25% of the deposit, which is very, very significant.
And scalping involves opening a large number of trades every day, up to several hundred.
Even a rough analysis indicates that in terms of losses from financial costs, long-term trading is the most effective.
What is the strategy's effectiveness in recouping costs?
Of course, there will be critics who claim that there are quite profitable short-term, intraday and scalping strategies whose effectiveness (read: earned profit) makes it easy to ignore all the financial costs.
Okay! Let's try to figure out how effective the strategy needs to be in order not just to cover the costs, but also to make a profit.
Let's imagine that we are in ideal conditions - there are no commissions, there is no spread and swap. Even opening transactions at random, with Take Profit to Stop Loss ratio as 1:1, you, statistically, will trade at breakeven - the ratio of profitable to unprofitable transactions will tend to 50:50.
If you do not trade at random, and analyze the market and get a loss only in 49 out of 100 trades made, then at a large number of transactions, this strategy will bring some profit. When the ratio of profitable trades/losses is 52/48, such a strategy will even allow earning. But this is in a "sterile vacuum", as for us any broker burdens the very same financial costs.
Let's return to the conditions described at the beginning of the article, adding to them the profit/risk ratio as 1:1. What efficiency will be shown by the trading strategies we have already considered?
Long term trading strategy
As we calculated earlier, 100 losing trades in a long-term strategy results in an additional loss of 1%. In order to recoup these costs, the minimum ratio of profitable trades to losing trades should be 52:48.
To earn more than that (for example, 10% for 100 transactions), you need to increase efficiency to a ratio of 56:44. That is, 44 times we lose 1%, 56 times we earn 1% and 1% on costs, in the end, remains a profit 11%.
Short-term trading strategy
Returning to previous calculations, we see that the loss on costs is 5% of the deposit at 100 losing trades. To earn at least 10%, this strategy must have greater efficiency than the long-term strategy. If there are 53 profitable trades out of 100, only the costs will be recouped. And the 58:42 ratio is enough to make 11% of profit after 100 trades.
Trading strategy for scalping
The costs for this strategy are the highest - 25%. To recoup them, you need to open 63 profitable trades out of 100. To earn 10%, you need to reach a ratio of 68:32.
To summarize
What do our calculations tell us? Considering the costs, the effectiveness of the trading strategy should be higher, and the smaller the value of the stop loss, the greater the impact of costs on the results:
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For a long-term strategy with a stop loss of 250 pips, it is enough to open 56 profitable trades out of 100 to earn 10%;
- for the medium-term strategy - 58 profitable deals out of 100.
- for scalping - 68 profitable deals out of 100.
Now you can clearly see that the more active the trading strategy and the smaller the size of the stop loss, the greater the impact on the effectiveness of the trading strategy have financial costs.
That's all fine, but it's doubtful that Forex can be predicted long term. Plus the confirmation that your strategy is really profitable, and not just lucky with the trend this time, you need actual trading history. When you hold positions for a long period of time, that history accumulates oooooo slowly.
I don't know anything about scalping. I can't imagine how you can outplay the spread without marts. But I can't give a weekly forecast either. 10-48 hours is a real horizon for Forex. The normal stock market is different, the horizon is dozens of trading sessions.
In the MT4/5 strategy tester, you can specify the spread size. You can run it on history first with a realistic spread, and then with a minimum of 1 point, and assess the difference in the results.
This is utter nonsense, they threw in and did not tell about the fact that these 10% on the long term you get for 12 months, and in scalping monthly, even in a quarter....
10% on scalping every month?
What about the risks? If it were that simple, the market would only trade by scalping.