How to Minimise Your Trading Costs

Apurva Sheth
Today I want to share with you two simple ways to increase your trading profits. But before I get to that, consider this:

What determines the success of a business?

Warren Buffett says it's the ability to control costs and price products higher than the competition.

Simply put - if a business is able to increase sales and maintain costs, overall profitability rises. If it can do this long term, it would be successful.

But back to trading.

Trading is like business. Just as businesses generate income from sales and incur expenses, the 'business of trading' generates income and incurs costs.

Just have a look at the table below:

Profit & Loss Statement of a Normal Business Amount (in Rs.) Profit & Loss Statement of a 'Trading Business' Amount (in Rs.)
Sales XXX Profitable Trades XXX
Expenses XX Losing Trades & Transaction Cost XX
Net Profit XX Net Profit XX

In the table, I compared the profit and loss statement of a normal business with a 'trading business'.

Sales for a trading business are the income from profitable trades. Expenses are transaction costs and trading losses. For both businesses, if you deduct expenses from income, you get net profit.

Just as a normal business aims to increase overall profitability by increasing sales and reducing costs, a trading business should aim to increase revenue from profitable trades and reduce losses and transaction costs.

The one and only way to ensure that your trading business generates more income is to develop a proper process and then have the discipline to follow it.

The biggest expense in the trading business is the losses from a trade that goes against you. They're just like any other cost of doing business. You can't avoid them completely, but you can minimise them.

One way to ensure minimal trading losses is to risk not more than a small portion of your capital on each trade. I have spoken at length about this in our recent video newsletters - How I Manage Risk in Trading and My Risk Management Tool.

However, another element - one that many traders ignore - is the transaction cost. Although transaction costs are small compared to your overall trading expenses, they do add up.

A Swing Trader subscriber wrote to me that he pays a brokerage of 2% (round trip) per trade. That is way too high when you are trading. But like any other business expense, brokerage fees are an expense you can reduce.

These days, many brokers offer trading services with a flat rate of Rs 20 per order. Moving from 2% to Rs 20 per order could have substantial impact on long-term profitability. Even more so the more trading capital you have.

But wait a second...

Before you rush out to scout for the cheapest broker in town, you need to consider many other factors. For example, if you trade equities, commodities, and currencies, you'd want your broker to facilitate all three segments. If you are a working professional or in a different time zone, you'd want your broker to support After Market Orders (AMO).

There's even more to consider... And we get a lot of queries from our subscribers about choosing the right broker and the kind of services they offer. To help them make this decision, we have written a Broker's Guide exclusively for members of Swing Trader, Alpha Trader, and Income Alert.

The ultimate objective of any business is overall profitability. Just as a normal business strives to control costs, a trading business should focus on minimising each and every cost to maintain overall profitability.

Do you have any tips on how to increase trading profitability? Share your views in the Club or share your comments here. Share your views in the Club or share your comments here.

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1 Responses to "How to Minimise Your Trading Costs"
vpm pillai
02 Apr, 2016
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