A lot of traders fail at this game because they are undercapitalized.
It has nothing to do with the strategy.
It has nothing to do with trend following, short term trading, swing trading, scalping, mean reversion, whatever. All trading has drag via commission, so you have to work backwards to ensure your trading will be profitable.
Let’s assume that your trend following strategy makes fifty transactions a year; fifty buys, fifty sells or one hundred transactions a year. Let’s assume you pay ten dollars per transaction. That’s a thousand dollars in commission for the year.
If you’ve got a ten thousand dollar account, you’re going to have to making 10% just to break even –and 10% is too much drag. If your account is smaller, let’s say its five thousand dollars, you’re going to have to be making 20% just to breakeven.
I’m not talking about strategy, I’m only talking about the mathematics of the transaction drag.
I don’t care how good your strategy is, if you’ve got to make 20% to breakeven, you’re pushing it up hill.
I’ve come across people who are actively trading, who need to make 40% to breakeven.
Calculate your commission drag
If your commission drag is more than 5%, you’ve got to make a choice. You’ve either got to increase your capital, or you’ve got to decrease the commission rate you’re paying, or a combination of both.
Or you have to stop trading until you have enough capital.
There is no point proceeding in this game if you’ve got to make 20% just to breakeven. It’s a ridiculous thing to do. If drag is more than 5%, you’ve got to act. You’ve got to stop trading, you’ve got to add more capital, you’ve got to get your commission drag down.
I can't stress this enough!
It surprises me how many people cannot be bothered to change brokers, even though a change of broker can cut your commission cost by up to 70%.
It’s easily done but people can’t be bothered to do it. That says to me that you’re not really interested in making an effort.
If you want to take trading seriously you’ve got to put everything in your favor. That means getting commission drag down.
It may be that you’ve got to change brokers, and yes that may be a hassle but it will be worth it if it makes the difference between success and failure.
If you don’t have enough capital, save more capital.
I don’t suggest borrowing money. If you don’t have enough capital, you shouldn’t be trading.
The market’s will always be there. Be patient. Wait until you’re in a better position to be able to make it mathematically possible to make money.