Operating Expenses and Trading Style

[Anonymous]

Operating expenses doesn't seem to be a consideration based on the amount that has been discussed in the threads.

How does operating expenses affect a trader's decision to use which trading style, whether a particular style of trading is really profitable after taking operating expenses into consideration?

Or maybe traders simply don't bother about the difference when making $1,000,000 gross profit but $1,000,001 operating expenses over one year of their trading enterprise?

 

[Trader333]

For me trading is treated as a business including all associated costs. That also means that I constantly look for ways of reducing costs at every opportunity and have been successful in doing this.


Paul

 

[Anonymous]

Not many traders may think of operating expenses as an important consideration in what to trade, how to trade etc, or even stop to consider just exactly what is profitable, with regards to trading as opposed to brokering?

According to an interview with a former stock day-trader:

"I was making 500 trades a day," he admitted, talking to The Sports Biz via telephone from his office in - geth this - Costa Rica. "I generated a tremendous amount of commissions for the broker, maybe three- to four thousand dollars worth a day. But I made something like $73.14 as a trader. It became clear to me that being in the broker business made a lot of sense."

Reference: http://www.startribune.com/stories/172/5256594.html

Like, just exactly who is profiting with the method one uses to trade? Like, a hundred trades a day to make a loss but the broker gets rich, or one trade a month and the broker gets mad.

 

[neil]

I take it from your comments that you are new to trading and maybe a novice to business theory? Treat it as a business. Study management accounting or business management. Only you know your income and expenditure and by utilising mathematics you will see what adds to the bottom line or detracts from it. So get some books and work it out. Paul is spot on.

 

[Mr. Charts]

Anon,
Clearly the cost of running the trading business is proportionate to the profits achieved.
Some costs are fixed - computer, data feeds etc., others are variable - broker commission.
All need to be kept under tight control. However it is very easy for some to become obsessed with the minutiae to the detriment of the job in hand.
If you trade 2-3 times a day with only 100 shares then if you are only modestly profitable taking a few cents per trade, your costs eat up much of that gross profit.
Of course if you trade in larger size and for much larger profits then those profits swamp the costs and your profit margin soars.
Commission is only significant on tiny profits. For example, if you trade 1000 shares and make only 6c then your $60 is reduced to $45 before fixed overheads.
If you trade 500 shares and have a $14 run then your $7000 is reduced to $6990
Obviously those are extreme examples. A more typical one is a trade where you make 65c on 1000 and your $650 is reduced to $635.
The other mistake people make is to go for the cheapest possible data feed. This is often a false economy since poor quality imput = poor profits.
Richard

 

[Tuffty]

I normally check out the sensitivity of any strategy to cost (ie direct costs of trading) changes. Should slippage increase then some strategies may not be worth trading.

Generally the direct cost of trading (brokers commission, spread, slippage) represent a higher figure in relation to profits the shorter the trading timeframe.

I'm always on the lookout for ways to reduce my costs. Any examples would be appreciated Paul (Trader333)?

 

[Anonymous]

neil,

As anyone can see from my Public Profile, I am actually a Pre Beginner, haven't reached the pre-schooling level. As a matter of fact, long ago I got "A" for Cost Accounting (I think it was, or Management Accounting, can't remember which one), although I did manage to pass Economics (can't remember if they were O or A level equivalents), but never seemed to pass Accounting, many reasons associated with and leading to this inate inability to pass Accounting, including attacked by severely deranged mad dogs.

What seems more incomprehensible is why the obsession with some traders insisting on trading say 100 lots of YM a day when they can trade 50 lots of normal size Dow?

Perhaps traders don't have to bother about the difference between trading efficiently to make their brokers rich and trading effectively to make the traders themselves rich?


P.S. "A" stands for absent.