Trading fees are the cost of doing business. For small accounts, trading fees will cut into your profits more, and make your losses bigger. Understanding the ways you can reduce trading commissions is useful for cutting down your trading overhead.
Cutting fees are not going to turn an unprofitable trader into a successful and consistent one. But it is useful to know these tips, as these little things can end up saving you thousands by the end of the year. Here are 3 ways you can reduce your trading fees:
1. Change Your Broker Commission Structure
Broker commissions are an unavoidable cost of trading stocks. But changing your commission structure to suit your style of trading can reduce how much you spend on trading commissions. Active traders who scale in and out of positions should not be paying a per-trade commissions structure.
A per-trade commission structure is the default type of commission structure most brokers will put clients on. Most brokerages charge between $5-$10 per trade. This can really add up if you are an active day trader who scales in and out of positions. You would save a lot of money by switching to a per-share commission structure.
If this is your style of trading, call your broker and request a change to a per-share commission structure. They will likely change your structure to keep you as a happy client, as you are still making them money regardless. Some brokers have per-share structures that get cheaper the more monthly volume you do (If you are trading larger position sizes).
2. Add Liquidity With Orders for ECN Rebates
Adding liquidity when you trade allows you to get ECN rebates when you put your buy/cover orders on the bid side and sell/short orders on the ask. If you take liquidity, ECNs will charge you additional fees. You will see these ECN fees on your broker statement. However, ECNs offer rebates to incentivize individuals to add liquidity and create a market for their securities.
In order to get these rebates, you need to have a direct access broker which has ECN routing options. You also have to make sure your broker offers rebates, and see if you have to take action to activate the rebates. Once you ensure your broker offers rebates, you need to make sure you are routing to the right ECN. ARCA is the most common one that offers rebates.
To get the rebates, you need to make sure you are routing your buy and sell orders to ARCA (if that’s the route they offer). You need to sit on the bid and wait to get your order filled to buy a stock, and you need to sit on the offer and wait to get filled on a sell order.
Keep in mind that sometimes your order may not fill if you cannot find a buyer or seller at the price you are looking to get filled at. You may have to adjust your order price to ensure your order executes. To increase the probability of getting your orders getting filled when adding liquidity, put your sell/short orders when the stock is spiking, and put your buy/cover orders in when the stock is dipping.
3. Avoid Overtrading
Even if you able to change your commission structure, you will still be paying a lot of money to your broker if you are overtrading. Overtrading is when you take too many trades in an attempt to make back the money you just lost, and results in you taking unnecessary losses. In addition to the trading losses you will take, you will rack up more commissions and fees. Overtrading is one of the biggest barriers for traders to overcome to achieve profitability. For tips on how to combat over trading, check out this article here.
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