quantitative developer at Xena Exchange
Hi there! It’s Sergey on the line, a quantitative developer at Xena Exchange.
This is the first article in the series of materials on How to boost your trading performance.
The series focuses on 5 important factors related to trading on exchanges:
I’ll tell you in detail about the intricacies of trading at the initial stages of your journey to smoothen it out as you go along.
The desire to make money here and now is familiar to everyone, isn’t it? But why is it so destructive? Essentially, because we disregard important, fundamental concepts in the pursuit of quick success. But it is impossible to achieve good results on the market without having the knowledge and understanding of these fundamentals.
For a novice trader, the main thing is to be able to stay on the market as long as possible and avoid losing everything from the get-go. Time and experience allow for a better understanding of the mechanisms moving the market and the intricacies of trading: how you can trade and how you cannot, and how to start earning and enjoy trading.
One of the fundamental concepts that a novice trader needs to understand as quickly as possible is the commission.
Why does size matter?
The size of the commission makes a significant contribution to the temporary decay of the deposit (if you are actively conducting intraday trading). Oftentimes, traders do not pay attention to the commission, since figures like 0.03% seem insignificant to them. But this is not as negligible an amount as it might seem at first glance.
For clarification purposes, consider the typical career path of a trader and their yield curve. For simplicity’s sake, we will create conditions that will demonstrate how exactly the commission affects the state of the deposit.
*The model is not meant to be scientific – it only illustrates the influence of the commission on the breakdown of the portfolios of market participants of different degrees of qualification.
Let us consider that you are going to make a deposit of $10,000 on the market. At first, you do not have a specific strategy and you trade intuitively or based on information from articles that you found on the internet. At the same time, you do not know anything about risk profiles or parameters of strategy optimization (by the way, we will discuss these topics in the following articles).
Let us also consider that you make 1 to 3 trades per day and enter a trade with a volume of 10 to 100% of your capital. Usually, novice traders trade at a loss at first in order to learn the ropes and gain enough experience, but we are considering how the commission affects the deposit, so we will assume that you are trading at 0, that is, the mathematical expectation of all your trades over a period of 1 year = 0. In this case, losses on the exchange will consist mainly of the commission. A sort of a tuition fee, per se:)
So, let us see how your deposit will change under such conditions during your first take on the market.
Daily loss will be calculated using the following formula:
daily delta = deposit_size * risk_rate * fee * 2 * trades_num
deposit_size – the size of the deposit, $10,000
risk_rate – the amount of risk per trade. Chosen at random from the range [0.2; 1].
fee – the size of the commission – varies depending on the exchange (see table below). Multiplication by 2 is necessary, since we make 2 transactions in 1 trade.
trades_num – number of trades per day. Selected at random from the range [1; 3].
The risk parameters and the number of trades per day will be generated randomly and averaged over 10,000 observations.
We will insert the predefined indicators and fee indicators (commission) into the formula. We will take commissions from 4 different exchanges and see how the deposit changes on each of them.
* - as on December 18, 2020
The graphs show that we will lose at least ⅓ of the funds per year on commissions alone.
This is where it becomes obvious that even a small commission starts playing a significant role if we take into account the context of our trading – the level of risk and the number of transactions per day.
In the next article, we will explore the concept of the “risk profile” and see how our chart would have changed if the risk level and strategy had been determined in advance.
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