Position Size vs. Commission Size

I guess I won't be buying that Rolls Royce just yet.
I guess I won’t be buying that Rolls Royce just yet.

“Best Swing Trade System EVAR!!” I yelled. (In my head, where I do much of my yelling.)

Unfortunately, it turned out to be the best system “evar” for someone other than me.

I had been working on codifying a system that incorporated the ideas discussed in this previous post (here). I came up with a pretty awesome system that backtested very well. And I’d started tracking current trades on paper, as well as entering into one trade using the new system.

But there was a fatal flaw. It turns out this system was making its money on nickels and dimes rather than on the big momentum bursts I had aimed for. Oh sure, it captured those too. But the bulk of the earnings over time came from little 1% and 2% moves.

“Hey what’s wrong with that, if it’s making money?” you ask. Well nothing…if you can make money that way! The problem though was that I had picked position sizes that were, shall we say, “aspirational” in nature? In other words, my system was using $6000 position sizes by default, but a more realistic position size for me is $2000 or so. This, unfortunately, made all the difference.

And it made the difference because of commissions! As an example, a .5% profit with a $6000 trade became a losing trade at $2000. And no, you can’t make it up in volume. This system broke because my actual commission/position ratio was much higher than my system was designed for.

I gotta say, this was a crushing blow. Not because a system I’d been playing with turned out to have flaws. But because it was The System…you know, My Edge. The System I Would Use To Slowly Get Rich. I felt really stupid after this, and in fact was kicking myself all weekend about it.

I’ve since come to terms with the problem, and I’m making sure that my other systems work well with my current portfolio, not my future portfolio.

So word to the wise: make sure any system you’re using will work with your particular circumstances. Don’t start using a day-trading system that gets excited over a .5% move with a $10,000 position and a deep-discount broker, if you’re investing $1000 at a time with a $9.95 commission each way. You’ll go broke fast.

The smaller the investment, the more time needed to make gains that offset the commission. And conversely, the shorter the trade, the larger the capital needed to consistently make money. Simple as that.

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