How Commissions and Fees Eat Into Your Trading Profits

A few dollars per trade does not feel like much. Over a year of active trading, it can be the difference between a profitable and a losing account. Costs are paid on every trade, win or lose, so they come straight out of your expectancy.

The costs that add up

• Commissions: per trade, per share or per contract.
• Exchange and regulatory fees: small charges passed through by brokers, common in futures and options.
• Spread: the difference between bid and ask. You pay part of it every time you cross the spread with a market order.
• Slippage: the difference between the price you expected and the price you got, especially on stops and fast markets.
• Financing: margin interest, overnight swap on forex and CFDs, and funding on crypto perpetuals. See funding rates.
• Platform and data fees.

A worked example

A day trader takes 8 round-trip trades per day, about 250 days per year: 2,000 round trips.

• Commissions and fees: $4 per round trip = $8,000
• Slippage and spread: $6 per round trip on average = $12,000

That is $20,000 a year in costs. If the trader's gross profit is $25,000, costs took 80% of it.

Measure your costs as a share of gross profit

Cost ratio = Total costs ÷ Gross trading profit

If the ratio is high, small improvements in cost have a large effect on net results. Look also at costs per trade compared with your average win. If your average winner is $40 and your costs are $8 per trade, a fifth of every winning trade goes to costs.

How to reduce costs

• Trade less. Fewer, better trades cut costs directly. See overtrading.
• Use limit orders where your strategy allows, to avoid paying the full spread.
• Avoid illiquid instruments with wide spreads.
• Compare brokers and pricing plans for your volume and instruments.
• Size appropriately. Per-trade minimum commissions hurt small positions most.
• Watch financing. Holding leveraged positions overnight for weeks can cost more than the commissions.

Record costs accurately

Your journal should use net P&L, with commissions and fees attached to each trade. Many statistics, such as profit factor, change meaningfully once costs are included.

In TradeThink

Imported trades keep their commissions and fees, and P&L is shown net of costs. The cash flow page shows fees and other costs month by month, so you can see exactly how much trading costs you.