Eliminate Transaction Costs When Stock Trading
Is it possible to pay zero commissions when stock trading? Well yes and no.
Right now I do not know of any broker that will execute orders for you for nothing.
But there IS a way that you can use your skills as a trader to pay your broker and still execute the trade without it costing you anything.
Welcome to "pajama trading".
Please read on: If you can eliminate most of your transaction costs you can change the way you trade, reduce risk and make more money.
I think the "secret" to realizing this goal is short term trading and that means taking a lot more trades.
If you are the kind of stock trader that only takes about ten trades in a year and hangs onto stocks forever you can skip this article because you can afford to pay your broker $50 for a trade and it will not change your bottom line very much.
But if you trade like me and execute 10 to 30 trades per day you should not pay any broker more than $4 per trade and you need to strive for positive slippage.
First let us define some terms: Transaction costs, for purposes of this discussion, are the commissions and fees you pay a broker to execute your trade PLUS slippage.
Slippage is the difference between the price your trading system enters a position and the price you actually got when you execute an order in real time based on the trading system you are using.
So if you place a resting order with your broker to buy 1000 shares of WOOPS at 1.
00 stop and he fills the order at 1.
01 your slippage is negative $10.
The slippage is negative because that extra penny in slippage is costing you $10 more than the theoretical system trade and this must be added to your total transaction costs.
But slippage can also be positive.
Rather than place a resting order with your broker you execute the order yourself "at the market.
" And then the market pulls back a tick or two while you are placing your market order and subsequently you may be filled at.
98 rather than the system buy point of $1.
00.
In that case you save $20 and you can subtract that amount from the commissions and fees you pay your broker to execute your market order.
The $20 you save is called positive slippage.
In this case you, rather than the broker, may be making money when you add up your transaction costs.
If the broker only charges you a $5 commission for doing a market order and you get $20 in positive slippage you are going to gain an extra $15 when this trade is closed out over and above what your trading system gains.
So how can you get positive slippage? To get positive slippage you need to practice a style of trading I call "pajama trading".
I call it pajama trading because I do not have a regular job.
I work at home sitting in front of a computer six and a half hours per day watching 96 stock markets.
And I like to be comfortable and so I trade in my pajamas.
So how does trading in your pajamas get you positive slippage and reduce your transaction costs to next to nothing? Before answering this question let's define some more terms: A RESTING ORDER is an order you place with your broker either by phone or electronically by way of a computer.
There are basically three kinds of orders: 1) Market Order 2) Stop Order 3) Limit Order.
A market order is just that, it is an order to buy the market at what ever price the market is trading at right now.
A market order is always filled.
A stop order is a kind of order that becomes a market order only when a certain price is first hit.
But a stop order is often filled at a price higher than where the stop is placed.
However a stop order is always filled.
A limit order is just that, it limits the price the order can be filled at and it cannot be filled at a higher price.
The problem with a limit order is that it may not be filled.
For a limit order to be filled price must first hit the limit price and then pull back a tick or two before moving higher.
If it does not pull back a limit order will not be filled.
My experience is that limit orders do not work for systems traders.
The sacred rule of a system trader is that he or she MUST TAKE ALL THE TRADES.
If you do not take all the trades you really have no system.
So limit orders do not work for system trading because limit orders cause you to miss trades.
And to make the problem worse it has been my experience that the best trades, the trades that make the most money, do not pull back and allow limit orders to be filled.
Limit orders cause you to miss the best trades.
Stop orders on the other hand are always filled.
Stop orders are what you usually place with a broker so you do not have to watch the markets.
The problem with stop orders is that they are frequently filled at a tick or two higher than where the stop is placed.
If a tick is worth $10 and you "are slipped" 100 ticks in a trading month it is going to add $1,000 to your transaction costs.
You can only get negative slippage with stop orders and you will never get positive slippage.
If there is positive slippage you can bet your broker will keep it.
So that leaves us with market orders.
The great advantage of market orders is that you can get BOTH negative and positive slippage and the two tend to cancel each other out.
And that brings us back to pajama trading.
If you are sitting in front of your computers and your 1.
00 buy price is hit you then hit the Buy-1000-shares-of-WOOPS-at-the-market button on your computer.
Stock prices can change more than a hundred times in a single minute and sometimes your market order for 1000 shares of WOOPS will be filled at a price higher than 1.
00 and sometimes it will be filled at a lower price.
But unlike those resting orders placed with your broker it can go either way.
Without any experience at all you will find you can reduce transaction costs by "pajama trading".
It is virtually impossible that you will not get some positive slippage by pajama trading.
But after watching markets for 6 ½ hours every day you are going to discover that sometimes you need to jump on a trade and sometimes you can pour yourself a cup of coffee before hitting the buy key.
You can develop a feel for this based on how those ticks are flashing across your computer screen.
By watching markets you can become a better trader with keen judgment and not be at the mercy of brokers.
I would like to think that years of pajama trading have made me a better trader.
But what I do know for sure is that because of my pajama trading skills my transaction costs are close to zero.
And that makes a huge difference in profits if I am executing 10 to 30 trades a day.
If you want to be a truly active trader and limit your risks by trading smaller positions in more markets you should consider pajama trading.
And believe me short term trading is much more profitable without transaction costs.
Right now I do not know of any broker that will execute orders for you for nothing.
But there IS a way that you can use your skills as a trader to pay your broker and still execute the trade without it costing you anything.
Welcome to "pajama trading".
Please read on: If you can eliminate most of your transaction costs you can change the way you trade, reduce risk and make more money.
I think the "secret" to realizing this goal is short term trading and that means taking a lot more trades.
If you are the kind of stock trader that only takes about ten trades in a year and hangs onto stocks forever you can skip this article because you can afford to pay your broker $50 for a trade and it will not change your bottom line very much.
But if you trade like me and execute 10 to 30 trades per day you should not pay any broker more than $4 per trade and you need to strive for positive slippage.
First let us define some terms: Transaction costs, for purposes of this discussion, are the commissions and fees you pay a broker to execute your trade PLUS slippage.
Slippage is the difference between the price your trading system enters a position and the price you actually got when you execute an order in real time based on the trading system you are using.
So if you place a resting order with your broker to buy 1000 shares of WOOPS at 1.
00 stop and he fills the order at 1.
01 your slippage is negative $10.
The slippage is negative because that extra penny in slippage is costing you $10 more than the theoretical system trade and this must be added to your total transaction costs.
But slippage can also be positive.
Rather than place a resting order with your broker you execute the order yourself "at the market.
" And then the market pulls back a tick or two while you are placing your market order and subsequently you may be filled at.
98 rather than the system buy point of $1.
00.
In that case you save $20 and you can subtract that amount from the commissions and fees you pay your broker to execute your market order.
The $20 you save is called positive slippage.
In this case you, rather than the broker, may be making money when you add up your transaction costs.
If the broker only charges you a $5 commission for doing a market order and you get $20 in positive slippage you are going to gain an extra $15 when this trade is closed out over and above what your trading system gains.
So how can you get positive slippage? To get positive slippage you need to practice a style of trading I call "pajama trading".
I call it pajama trading because I do not have a regular job.
I work at home sitting in front of a computer six and a half hours per day watching 96 stock markets.
And I like to be comfortable and so I trade in my pajamas.
So how does trading in your pajamas get you positive slippage and reduce your transaction costs to next to nothing? Before answering this question let's define some more terms: A RESTING ORDER is an order you place with your broker either by phone or electronically by way of a computer.
There are basically three kinds of orders: 1) Market Order 2) Stop Order 3) Limit Order.
A market order is just that, it is an order to buy the market at what ever price the market is trading at right now.
A market order is always filled.
A stop order is a kind of order that becomes a market order only when a certain price is first hit.
But a stop order is often filled at a price higher than where the stop is placed.
However a stop order is always filled.
A limit order is just that, it limits the price the order can be filled at and it cannot be filled at a higher price.
The problem with a limit order is that it may not be filled.
For a limit order to be filled price must first hit the limit price and then pull back a tick or two before moving higher.
If it does not pull back a limit order will not be filled.
My experience is that limit orders do not work for systems traders.
The sacred rule of a system trader is that he or she MUST TAKE ALL THE TRADES.
If you do not take all the trades you really have no system.
So limit orders do not work for system trading because limit orders cause you to miss trades.
And to make the problem worse it has been my experience that the best trades, the trades that make the most money, do not pull back and allow limit orders to be filled.
Limit orders cause you to miss the best trades.
Stop orders on the other hand are always filled.
Stop orders are what you usually place with a broker so you do not have to watch the markets.
The problem with stop orders is that they are frequently filled at a tick or two higher than where the stop is placed.
If a tick is worth $10 and you "are slipped" 100 ticks in a trading month it is going to add $1,000 to your transaction costs.
You can only get negative slippage with stop orders and you will never get positive slippage.
If there is positive slippage you can bet your broker will keep it.
So that leaves us with market orders.
The great advantage of market orders is that you can get BOTH negative and positive slippage and the two tend to cancel each other out.
And that brings us back to pajama trading.
If you are sitting in front of your computers and your 1.
00 buy price is hit you then hit the Buy-1000-shares-of-WOOPS-at-the-market button on your computer.
Stock prices can change more than a hundred times in a single minute and sometimes your market order for 1000 shares of WOOPS will be filled at a price higher than 1.
00 and sometimes it will be filled at a lower price.
But unlike those resting orders placed with your broker it can go either way.
Without any experience at all you will find you can reduce transaction costs by "pajama trading".
It is virtually impossible that you will not get some positive slippage by pajama trading.
But after watching markets for 6 ½ hours every day you are going to discover that sometimes you need to jump on a trade and sometimes you can pour yourself a cup of coffee before hitting the buy key.
You can develop a feel for this based on how those ticks are flashing across your computer screen.
By watching markets you can become a better trader with keen judgment and not be at the mercy of brokers.
I would like to think that years of pajama trading have made me a better trader.
But what I do know for sure is that because of my pajama trading skills my transaction costs are close to zero.
And that makes a huge difference in profits if I am executing 10 to 30 trades a day.
If you want to be a truly active trader and limit your risks by trading smaller positions in more markets you should consider pajama trading.
And believe me short term trading is much more profitable without transaction costs.
