Your Stop Distance Decides What Trading Costs You
The same fee costs you eight times more on a tight stop than on a wide one. Your broker charges the same either way. The difference is the distance the price has to travel against you before you are out, and that distance decides what a round trip is worth in risk terms.
It sets your breakeven win rate: the share of trades you have to win before the system has made you anything. At one to one with no costs, you need 50 percent. Charge a round trip worth a tenth of your risk and you need 55 percent. Charge one worth half your risk and you need 75 percent.
What is the breakeven win rate, and what do costs do to it?
The breakeven win rate is the share of trades a system must win to finish level. With a reward to risk of b and no costs at all, it equals 1 divided by (b + 1). A one to one system needs 50 percent and a three to one system needs 25 percent.
Costs do not add to that number. They multiply it.
Write your round trip cost as k, measured as a fraction of the amount you risk on the trade. Then:
breakeven win rate = (1 + k) / (b + 1)
The old figure, multiplied by (1 + k). A round trip costing a tenth of your risk lifts a 33.3 percent requirement to 36.7 percent, and a 50 percent requirement to 55 percent. The multiplier lands on a bigger base when b is small, which is why a one to one system feels costs harder than a three to one system does.
Your journal can show you the same thing without the algebra. Net average R equals gross average R minus k. A system with a gross average of +0.30R that pays 0.50R in costs runs at minus 0.20R, and every rule inside it can be sound.
That gap is the difference between gross expectancy and net expectancy. We cover expectancy and R-multiples in how to measure your trading edge if either term is new to you.
How much of what traders lose is cost rather than bad trading?
Commissions alone cost individual investors more than their gross trading losses did.
Barber, Lee, Liu and Odean obtained the complete transaction history of every trader on the Taiwan Stock Exchange from January 1995 to December 1999. Over those five years individual investors lost NT$935 billion, which the authors put at 2.2 percent of Taiwan's gross domestic product and a 3.8 percentage point annual reduction in the return on their combined portfolio.
They split the loss four ways: commissions 32 percent, trading losses 27 percent, market timing losses 7 percent, and transaction taxes 34 percent. Set that last slice aside. It comes from a 0.30 percent tax Taiwan charged on every sale, and most markets have no equivalent.
The commission number is the one that travels. Taiwan capped commissions at 0.1425 percent per trade, and at that rate those investors still paid more to place their trades than they lost by picking the wrong ones. Turnover there ran near 300 percent a year, two to three times the American rate of the period, so read this as a high turnover market rather than a forecast for your own account.
Why does the same fee hurt more on a tight stop?
The cost of a round trip in R terms equals the round trip as a percentage of your position divided by your stop distance as a percentage of your position.
Both figures are percentages of the same position, so position size cancels out. Your account balance goes with it, and so does your currency. You are left with a ratio between two distances: what the trade costs to open and close, and how far the price has to go against you before you are out.
Hold the fee still at 0.2 percent for the round trip and move only the stop:
| Stop distance | Cost per trade in R |
|---|---|
| 8 percent away | 0.025R |
| 5 percent away | 0.040R |
| 2 percent away | 0.100R |
| 1 percent away | 0.200R |
Eight times the damage from the wide stop to the tight one, and only the stop moved. Push the fee to 1 percent against a 1 percent stop and the round trip costs a full 1R before the trade has done anything at all.
Cost warnings from day traders therefore do not transfer to someone holding for a week. Swing traders did not find a cheaper broker. A multi day hold carries a wider stop, and a wider stop shrinks k. One trader on r/Daytrading described it without the arithmetic: "I don't pay commissions, only spread, which is pretty negligible on the higher timeframes I trade on." Another, answering whether commissions are charged per share or per trade, said the charge is much the same regardless of size and that "the real cost is how many times you click buy/sell." Treat both as individual accounts rather than a survey.
How do you work out your own cost hurdle?
Three numbers, and your journal already holds two of them.
- Your round trip cost as a percentage of position. Add what you pay to open and what you pay to close, including the spread you cross. Divide by the position value.
- Your typical stop distance as a percentage of position. Entry price to stop price, divided by entry price.
- Divide the first by the second. That is k, your cost per trade measured in R.
Now set k beside your gross average R. If your gross average sits at +0.30R and k works out at 0.05R, costs are a rounding error and your attention belongs elsewhere. If k works out at 0.25R, costs are taking most of your edge and the system sits one bad month from negative. If k is larger than your gross average R, the rules are not the problem.
Run it per setup rather than across everything. A breakout entry with a tight stop and a pullback entry with a wide one produce different hurdles from the same fee schedule, and averaging the two hides both.
Does a wider stop lower the hurdle?
Widening the stop lowers k, because k is the fee divided by the stop distance. That is arithmetic and it holds.
It costs you something. A wider stop at the same risk means a smaller position, which means less exposure to the move you were right about. You have moved the problem rather than removed it, and the trade only improves if the wider stop keeps you in trades that were shaking you out.
So k tells you whether costs deserve your attention. It does not tell you where the stop belongs. Put the stop where the trade is proven wrong, because a fee schedule cannot answer that question for you.
When do costs kill a system its rules would have carried?
Costs decide the outcome when the gross edge is thin and the stop is tight. Those two conditions tend to arrive together.
A tight stop is attractive for a reason. It allows a bigger position for the same risk and it gets you out fast when you are wrong. It also raises k on every trade, and it tends to lower your gross average R, because it takes you out of trades that would have recovered. The multiplier grows at the same moment the base shrinks.
The gap between a backtest and a live account often traces back to this. A simulation fills you at the closing price and charges you nothing to get in or out, which deletes k from every trade in the record. We have written about why a backtest tests the strategy and not the trader, and the cost gap is the other half of that story. Your live results can diverge from a backtest without you breaking a single rule.
For real current pricing rather than assumed figures, our comparison of Australian brokers for swing traders carries the actual fee schedules.
Frequently asked questions
What is a breakeven win rate? The share of trades a system must win to finish level. With a reward to risk of b and no costs it is 1 divided by (b + 1), so a two to one system needs 33.3 percent. Costs multiply that figure by (1 + k), where k is your round trip cost measured as a fraction of the amount you risk.
Do trading fees matter if I only place a few trades? Fewer trades means you pay k fewer times, so the annual drag falls. The hurdle on each individual trade stays where it was. Your stop distance sets that, not your frequency.
Is a wider stop always cheaper? A wider stop lowers your cost per trade in R terms. It also forces a smaller position for the same risk. Cheaper per trade is not the same as better, and the stop belongs where the trade is proven wrong.
How do I know whether costs or my rules are the problem? Set k beside your gross average R. If k is the larger number, no change to your entry rules will fix the account. If your gross average R is the larger number, costs are not what is holding you back.
Why do day traders talk about costs more than swing traders? Tight stops and high frequency both raise the cost burden. A day trader can pay several times more per trade in R terms than a swing trader paying the same fee at the same broker.
General information only. Not financial advice.