Paying Trading Tolls: A necessary evil known as commission

Many traders are familiar with the concept of "paying tuition"- the idea that you must lose money to the market to learn valuable lessons and gaining practical experience in executing trades properly,  minimizing losses, and finding a strategy that really works (among other things). This rite of passage is revered to the point of it being instinctively thought of as paying tuition to Mr. Market, though I'm sure most of us only choose to call it that after the fact, not at the outset of our trading endeavors.

However, one thing that many people don't actually appreciate much is that pesky fee we pay each time a trade is executed, also known as commission. How does one actually appreciate this most middle of middle men, this tax on trades, this seemingly senseless fee that takes away from your trading profits or adds to your losses while adding to your brokerage's bottom line?

I, for one, have actually come to appreciate the value brought about by a good trading platform, access to real-time data, familiarity/ease of use in navigating tools/forms that help make profitable trades, and good trade execution by the brokerage. Although I cannot fault those that choose to use free platforms with no commissions, something tells me this comes at a significant cost if you're a more nimble trader than someone who re-balances their portfolio holdings once a quarter.

I've found that by expecting a quality service in return for a commission instead of fighting commissions actually improves overall results. This attitude change can help free you from allowing commissions to dictate your trading style. Concentrate on becoming profitable first, and then scrutinize your commissions vs. the service/features you're receiving (and try to negotiate this w/ brokers).

Of course you want to make smart upfront decisions, such as comparing prices offered by different platforms that offer similar capabilities that meet your preferences/needs. You also don't want to accept high commissions for great service, but then apply it to a tiny account where a significant percentage of your account might be exhausted by commissions when actively traded. Even wealthy HFT funds would go broke if they payed retail commission rates, for example. But under normal circumstances, choosing say a less reliable platform simply due to a more competitive commission structure isn't the best idea. The opportunity cost of that can be huge. I've been a victim of unreliable platforms or convoluted order forms that make active trading difficult, and I've also been the benefactor of intuitive and reliable platforms whose ease of use and good execution very clearly translates to more profitable trades.

Think of commissions as a "toll" you pay along the way. If you want to get to work faster and with fewer potholes, you might be willing to pay a toll. Of course that decision is only happily made when you know about the alternatives- e.g., missing meetings because of being stuck in traffic jams or having your tires blown out by potholes on under maintained highways.

If you knew that your efforts to save commission were actually having a significant detrimental effect on your trading returns, wouldn't you consider paying more? In a counterintuitive twist, it turns out that I'm actually more profitable the more commissions I pay! I know, brokers around the word probably want to make me their Allstate Guy right now. It's a bit counterintuitive, but it happens to suit my short-term style of trading. Think of it as choosing to travel by private plane, where you're paying more transaction fees to get around, but you're getting around to more customized, valuable places, with much less headache. I find that by limiting my trades to smaller, shorter-term bets,  it leads to better "granularity" in my returns, where the merits/edge of my trading are better manifested over a series of trades (and discounting luck that might be associated with one or two miracle trades). If commissions eat too much into my profits, I'll consider tweaking the strategy for less frequent trades, but not at the cost of profitability! This chart explains the concept, where the assumption is that you're linearly increasing your trading activity each month (but with a nonlinear increase in monthly profit since it gets harder to scale as you trade more):

Taken to the extreme, you can actually run a monthly loss, at which you're officially over-trading:

Hope this gave you more insight on commissions and helps maintain perspective on how commissions are really affecting you. Instead of getting angry over how they're cutting into your profits, try to quantify its impact given your style of trading.