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The daily cost of doing business

Lesson 3 · about 9 min

Barber and Odean showed that the active traders in their sample earned roughly the market return before costs and lost to it after. Costs are the leak that sinks most intraday accounts, and they are almost never counted because each one is small. This lesson counts them.

Four costs, per trade

  1. Spread. You buy at the ask and sell at the bid. Every round trip pays the full spread once, whether or not the trade works.
  2. Commission and fees. Per share, per contract or per lot, plus exchange, clearing and regulatory fees.
  3. Slippage. The difference between the price you clicked and the price you got. Near zero in a quiet large cap; several ticks in the first minute of the open.
  4. Data and platform. Fixed monthly costs that have to be earned back before the first dollar of profit.

A worked day in each product

Assume 8 round trips a day, 20 trading days a month.

US large-cap stock, 500 shares, $0.01 spread. Spread cost: 500 × $0.01 = $5 per round trip. Commission at $0.005 per share each way: $5. Regulatory and exchange fees add roughly $1. Slippage in a liquid name, about half a cent per side: $5. Total about $16 per round trip, $128 per day, about $2,560 a month.

Small-cap stock at $4 with a $0.02 spread, 2,000 shares. Spread: $40. Commission: $20. Slippage of a cent per side: $40. Total about $100 per round trip, $800 per day. Small caps look cheap per share and cost the most.

ES, 1 contract. Spread is one tick ($12.50) paid once per round trip. Commission and fees about $4 round trip at a discount broker. Slippage half a tick on average: about $6. Total about $22 per round trip, $176 per day.

MES, 1 contract. Spread one tick ($1.25). Commission and fees around $1 to $1.50 round trip. Slippage negligible in the RTH session. About $3 per round trip, $24 per day. Note the commission is a much larger share of the tick on micros, roughly one tick. That matters for scalping.

EUR/USD, one mini lot (10,000 units), 0.8 pip spread. Spread: 0.8 × $1 = $0.80. Commission, if any, about $0.70 round trip. Total about $1.50 per round trip, $12 per day. Cheap, but you also have far less movement to capture per unit.

BTC perpetual, $10,000 notional, taker fee 0.05% per side. Fees: $10 round trip. Spread a few dollars. Funding if held across the 8-hour mark. About $13 per round trip, $104 per day.

Product Cost per round trip Cost per day (8 trades) Cost per month
Large cap, 500 sh $16 $128 $2,560
Small cap $4, 2,000 sh $100 $800 $16,000
ES, 1 contract $22 $176 $3,520
MES, 1 contract $3 $24 $480
EUR/USD mini $1.50 $12 $240
BTC perp $10k $13 $104 $2,080

Cost as a fraction of your edge

The number that matters is cost divided by average risk per trade. If you risk $100 per trade and pay $16 in costs, you are giving up 0.16R on every trade before the market moves. A strategy with 0.3R expectancy on paper is a 0.14R strategy in reality. A strategy with 0.15R expectancy is a losing one.

Cost in R = cost per round trip ÷ dollar risk per trade

Cost per trade Risk per trade Cost in R Paper expectancy needed to net 0.1R
$16 $100 0.16R 0.26R
$16 $250 0.06R 0.16R
$100 $250 0.40R 0.50R
$3 $40 0.075R 0.175R
$22 $400 0.055R 0.155R

The small-cap line is why most "cheap stock" day traders fail. A 0.4R cost per trade is nearly impossible to overcome; the trader needs a genuinely excellent edge just to reach break-even.

Key idea: Measure cost in R, not dollars. Anything above about 0.1R per trade needs a rare edge to beat; anything above 0.25R is a structural loser regardless of skill.

Fixed costs

Add the monthly fixed bill: market data (exchange fees for real-time Nasdaq or CME depth typically run $10 to $40 a month per feed for non-professionals), a charting platform ($0 to $60), a scanner if you trade stocks ($30 to $100), and news. A modest stack is $50 to $200 a month. On a $25,000 account that is 0.2% to 0.8% a month that must be earned before you are up.

The daily nut

Put fixed and variable costs together and you get your daily nut: what the account pays each day just to sit at the table.

Large-cap stock trader: $128 variable + $150 ÷ 20 = $7.50 fixed = about $136 a day. On a $25,000 account, that is 0.54% of the account per day, or about 11% a month, that has to be earned back. Cutting to 4 trades a day halves it. That is the strongest argument for trading less that exists.

Try it: Count your trades from the last five sessions (or the five you plan). Multiply by the round-trip cost for your product from the table. Add a fifth of your monthly fixed costs. That is your daily nut. Divide it by your average dollar risk per trade to get the cost in R.

Recap

  • Every round trip pays spread, commission, slippage and a share of fixed data costs.
  • Small caps are the most expensive product per dollar of risk; index micros and majors forex the cheapest.
  • Express cost in R: cost per trade divided by risk per trade. Above 0.1R is hard, above 0.25R is structural loss.
  • A large-cap stock trader taking 8 trades a day on $25,000 spends roughly 11% of the account per month on costs.
  • Fewer trades is the only cost cut that also improves selection.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.
The spread of outcomes behind an expectancyA histogram of forty trades: a tall block of small losses on the left, a low spread of larger wins on the right, and a line marking the average outcome.NUMBER OF TRADES051024 LOSSES, AVG −$20016 WINS, AVG +$600EXPECTANCY +$120−$400−$200$0+$200+$400+$600+$800PROFIT OR LOSS PER TRADEexpectancy = (40% × $600) − (60% × $200) = +$120 per trade
Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.