Keeping Your Expenses In Check

by David Jenyns on September 3, 2007

There are a lot of qualities both personally and financially that one must have to be a good day trader. One that often gets overlooked is remembering to incorporate your expenses into your trade outcome.

The “invisible eighth” is a factor that no one — not even a member of the New York Stock Exchange — can overcome. The bid and asked price is never less than an eighth apart. If the market is 45 1/4 to 3/8 when you buy, you will as a rule, pay 45 3/8. Were you to sell it would be at 45 1/4. This hypothetical difference follows you all through the trade and has been designated by the writer as the “invisible eighth.”

The tape reader who is a non-member of the exchange must, therefore, realize that the instant he gives an order to go long or short 100 shares, he has lost an eighth of a point. In order that he may not fool himself, he should add his commissions to his purchase price, or deduct them from his selling price immediately.

People who boast of their profits usually forget to deduct expenses. Yet it is this insidious item that frequently throws the net result over to the debit side.

The expression is frequently heard, “I got out even, except for the commissions,” the speaker evidently scorning such a trifling consideration. This sort of self-deception is ruinous, as will be seen by computing the fixed charges on a trade of 100 shares.

Bear in mind that a loss of the commission on the first trade leaves double that amount-to be made on the second trade before a dollar of profit is secured.

It therefore appears that the tape reader’s problem is not only to eliminate losses, but to cover his expenses as quickly as possible. If he has a couple of points profit in a long trade, there is no reason why he should let the stock run back below his net buying price.

Here circumstances seem to call for a stop order, so that no matter what happens, he will not be compelled to pay out money. This stop should not be thrust in when net cost is too close to the market price. A small reaction must be allowed for.

A tape reader is essentially one who follows the immediate trend. An expert can readily distinguish between a change of trend and a simple, minor reaction.

When his mental barometer indicates a change he does not wait for a stop order to be caught, but cleans house or reverses his position in an instant. The stop order at net cost is, therefore, of advantage only in case of a reversal, which is sudden and pronounced.

A stop should also be placed if the operator is obliged to leave the tape for more than a moment, or if the ticker suddenly is out of order. While he has his eye on the tape the market will I tell him what to do. The moment this condition does not exist he must act as he would if temporarily stricken blind he must protect himself from forces that may attack him in the dark.

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