What are trading commissions?
Before we choose a broker to do trading we should know what we want to do.
We have to be sure what are trading plan is and what asset is the most adequate for that.
To have a trading plan before we should have a deep knowledge of how the stock market works.
If we have some knowledge with experience in the real markets, books, reading market literature, courses, etcetera, we can say we are ready to have a trading plan and therefore choose a broker.
Trading Commissions rates
We will be able to choose between traditional stock brokers, futures, options, cfds or forex brokers, and even binary ones.
So are we going to do short term trading or long term investing?
Between both worlds there is a wide range of possibilities, from 30 seconds binary trades to 30 years investing plans.
Investing or trading?
The best a novice person in this world could do is doing long term investing, just buy and hold stocks. This can be done through a diversified portfolio or buying funds or ETFs.
The key is to maintain those assets for long term and adding new ones often, as if building a sort of private pension scheme.
Doing like that, it will be very difficult to lose in the long term. Although depending on the country and the situation there are occasions we can lose all.
Cases like Japan with more than 25 years of dead market; Greece and Cyprus with falls of more than 90%; or even cases like communists Russia or China. However, to tell the truth, in those extreme cases other assets were worthless as well. The best to do in such a situation is run away.
Short term trading business
If we want to do trading we have to know that it is a very difficult business and that the majority of people lose there.
The shorter the frame the more likely that we are going to lose.
Long term investing commissions
Long term investing commissions are not an impediment for those who want to do it.
Investors simply look for a traditional broker with decent administration costs and wait patiently for years.
In this case the best thing to do is to search for the different brokers and compare their fixed and maintenance costs. There will be significant differences in them, especially when our capital is small.
It is obvious that if we choose this investing strategy the amount of commissions we will pay will be quite low, especially when we compare this to short term trading. Furthermore, we can not expect to make high returns doing this. Although in the stock market small returns are better than none or negative ones.
Short term trading commissions
If we want to do short term trading the problem of commissions will be of the utmost importance.
However, as I said before, the shorter the time frame the more difficult and “expensive” will be for us.
The problem here is the trading costs.
Those trading costs are not only the commissions, but also the spread and the inefficiencies of the trading activity, i.e. slippage.
That is why it does not make sense trading an asset with a 5 spread and looking for 20 points profit.
We should look for assets with low spread and brokers with low commissions.
That is why a trading plan is important, because we should know what ratio of profit/loss we should have in whatever asset and the costs associated to it.
Commissions trend trading
A better way of doing short term trading than day trading is that of trend or swing trading.
Doing so we will be able to ride for longer periods of time paying, consequently, fewer commissions.
The advantage of it is that we should be able to capture the famous trends of the market.
Obviously, this is a field we do not expect to make 100% profit every year, but with a good plan we could expect to win from 5 to 30%.
If we are able to win a 15% as average we should be very happy.
Trading commissions cost
We can do trading with stocks, CFDs, Forex, Futures or even binary options.
The worst way to do it is with binary options. The probability of making money there are close to 0, if not 0.
The best way to do so is through stocks or futures and to a lesser extent CFDs and Forex.
Futures trading commissions
With futures there is a little problem.
Being an ideal asset for swing trading it usually has a too big nominal size which makes it not appropriate for small traders. That is why you should not try to start a futures career with a 5.000 dollars.
When we deal with contracts valued 50.000 or USD 300.000, we can not do swing trading unless we are well capitalized.
Stock trading commission
With stocks we have two small problems.
One is that they do not normally allow leverage, unless you are in the United States, where you can get some.
Second, small traders have to pay a minimum trade fee what can make his trading costs a bit expensive.
However, both problems are not actually so since leverage is a very dangerous weapon and also if you are too “small” it is better that you do not trade.
For instance, the second problem I mention is that in many brokers you end up paying almost the same commission for a 2.000 than for a 20.000 trade.
CFD trading commissions
Other instruments very efficient from the point of view of trend trading are CFDs and Forex. Although it is very difficult to win there in the long run.
CFD commissions are usually bigger than the stock ones. However, there is the case when many brokers offer small lots of stock CFDs which allow us to trade with decent flexibility.
For instance I can buy 10 CFD stocks of X with a 0,20% spread, whereas if we trade 10 stocks and pay a minimum fee of 8 dollars plus the spread we are worse off.
Forex trading commissions
Forex also offers us an interesting market to trade for the short and medium term. That is because most forex brokers allow us to trade in small lots of 1.000 units and with small costs involved.
Forex is, therefore, a very good asset to learn trend and swing trading, nonetheless, it is not an easy market.
As usual, the broker commissions will be more or less important depending on the time horizon.
If we look for 20 pips then spread and commissions will be crucial.
But if we look for 400 pips, they will matter less.
What broker and asset to choose?
The one that suits our trading plan.
For some people it will be futures, for other people it will be stocks or Forex.
Commissions are very important in trading, but more important is to have a clear trading plan with a predetermined time horizon.