Low commissions are critical for trading success

For active traders and investors there are two main problems that must be addressed, 1) find a strategy or signal that has an edge, and 2) trade this edge at the lowest possible costs to maximize profits. The first problem is solved by careful research and experimentation with trading and investing strategies. The second problem is solved by choosing a trading platform with best-in-class, ultra-competitive prices, like those that Saxo now offers, especially for accounts and trades of modest size. Below we offer comparison of the old and new terms of Saxo pricing and the impressive scale of the impact from the new, lower prices relative to the old, using some specific examples.

Example 1: The active trader and the impact of lower trading costs

Let’s start with an aspiring active trader in Switzerland that is a Saxo Classic client that has a trading strategy for highly liquid US stocks that trade on NYSE and Nasdaq exchanges. Let’s say that the account size is CHF 8,500 (approximately USD 10,000. For simplicity’s sake, we’ll assume the trader has opened a USD sub-account to avoid currency conversions in our example.)

Trading size and number of trades: we’ll assume that our aspiring trader makes 100 round-trip trades over a year, with each trade representing a USD 5,000 market exposure (half of the account). The average stock gains or losses on average per week 1.6%. Let’s further assume that the trader has found a trading edge that keeps the trading win ratio at 65% (during the past 10 years the S&P 500 Index has gained in 57.9% of those weeks). Taking all of these inputs into account, this results in an average expected return per trade, of 0.48% (or USD 24 on each USD 5,000 position traded on average). This may look modest, but it would mean a gain over a year of USD 2,400, or 24% of the base account size of USD 10,000 over 100 trades (without taking into account trading costs or compounding).

Under the old terms for Saxo Classic clients in Switzerland each of the trades would have incurred a minimum USD 40 per trade (it is USD 20 times two for the buy-sell round trip), taking the edge down to a negative USD 16 from the no-cost theoretical edge of USD 24 per trade. In other words, the old commission structure would have cost all of the trader’s entire USD 24 per trade edge, requiring much larger trades to justify the commissions and maintain the edge.

But what do the results look like for this trader using new terms for Saxo Classic accounts in Switzerland? These are now set at either 0.08% of the position (in this case USD 5,000 x 0.0008 or USD 4) or a USD 1 minimum. With this pricing structure, trading costs for a position size of USD 5,000 would drop 80%, from USD 40 (USD 20 x 2) to USD 8 (USD 4 x 2) – again everything is multiplied by two to round-trip costs. This vastly improving the edge from USD -16 to USD +16 per trade after trading costs. This would mean an additional return of 32% for the strategy over the course of 100 trades. The potential for improved returns would be enhanced further, of course, by compounding if the strategy is a consistent winner.

As you can see, the lowering of trading costs drastically improves the profitability of a trading strategy, even when the USD 32 round-trip difference in costs is far smaller than the average win or loss of USD 80 (the 1.6% average win/loss for this strategy’s trades). In such an example, this is why lower trading costs are as important as finding a trading edge for any active trader or investor. And for smaller positions, the percentage improvement in trading costs is even more dramatic.