Do You Know How To Beat Your Broker?

As retail investors, we sometimes forget that our trading capital is our working capital. It is labeled risk capital for two reasons: 1) there is inherent risk in investing, and 2) it is not wise for us to lose or degrade our lifestyle in unsuccessful trading. We have expenses that hit us with each trade and each loss. Every trade we take, we pay a commission, be it the upfront cost and spread or the raw spread and entry/exit commission.

Every trade we lose is working capital that is taken, and it is our job to persistently capture wins to keep our ascending equity curve. An eye-opening moment I had as a trader was realizing my broker was acquiring 20-30% of my bottom line through the cost of doing business. A retail trader’s broker is strategically positioned to be paid on all executed trades whether the trader wins or loses. Well, if we are the President/CEO/CFO/MOD and everything top to bottom of our MY CAPITAL INC*, we should be looking for ways to improve our bottom line.

How to Beat the Broker Costs

Part of doing this is learning how to beat the broker cost. First and foremost, as traders we must be willing to change the way we do business. this is often the most difficult yet most critical step. If we are not satisfied with our results or methods, we have to be open-minded enough to go back to our humble beginnings and rebuild a process that yields positive results. Most retail traders often make the right decision and choose the correct trade setup, but inappropriately manage trade size or grow impatient with the lackluster movement and mismanage winning trades with premature exits. This process may require a psychological overhaul just as much as a strategy or methodology refinement.

Review Your Trading Plan

Next, we have to curve our cost of doing business by learning how we could beat our broker. A thorough assessment of your trading plan is a good start.

I would recommend reviewing the following areas: frequency of trades, average holding period, average win by dollar, average loss by dollar, win percentage, loss percentage, and commissions. Reviewing these metrics could help you understand your trading history, your strengths, shortcomings, and most importantly, illustrate areas that may necessitate improvements to produce a positive bottom line. I firmly believe that the best traders in the world are usually not concerned with the glamor of the trading process, but rather the effectiveness and end result.

Simply put, do you produce larger wins than you do in losses (in raw dollars and percentage-wise)? If you can answer yes to this statement, then your reflection should be that of a successful trader. If this is not you, then it may be meaningful to educate yourself on the importance of the aforementioned metrics. One’s trading style and path to success may be as unique as the individual’s DNA, but the introspection necessary to find the process that works for you is absolutely mission critical.

Negotiate with Your Broker

For the individuals with successful and profitable strategies, nothing necessarily has to change other than re-negotiating broker terms, commissions, and spreads based on trade volume and trade size. I’ve found that brokers are usually receptive to negotiating terms based on volume requirements, trade size, and total trading capital. This may not strike you as a game-changer, but for the trader placing 1000+ trades per year or 10,000+ trades in a lifetime, this will save you $X for a reduced spread, or $X on a reduced commission. This getting a better deal from your broker could tip your cost of business in your favor.

This is similar to the casino whale that is able to negotiate house terms based on bet size, game rules, exceptions, loss insurance, comps, and time spent at the tables. These players do not make the trip to lose and attempt to negotiate with the house to level the playing field. Trading is very similar, though serious traders with a long-term performance record will tell you that planning, selection, probabilities, and process are all very important elements for creating profitable results.

What does this look like for traders like us? Short-term traders are often individuals in the trenches day in and day out with limited overnight exposure. These traders often take multiple entries per day with established risk thresholds and maxium drawdown, loss, or time parameters.

What about long-term position traders? These traders may fall under a variety of classifications – long-term, mid-term, and /or short-term. One extreme may be traders who hold positions open for months and years at a time with time, interest, and dividends on their side. Another extreme may be more intermediate traders with daily and weekly positions with reduced market noise and a big picture perspective.

The Bottom Line

At the end of the day, I dare say no true trader really cares how the process produces profits. What matters is that the process is repeatable, trustworthy, and simple to obey. Traders need discipline but it is important to note that often they are operating in a self-governed environment – therefore the discipline, must be intrinsic. Your job in becoming a successful and profitable trader revolves around understanding your tolerances, taking pride in your planning, committing to the process, and executing when the market is worthy of your time and money.

Brokers will be there to house your account, but you do not have to give them the upper hand when there are a few simple things you can do to modify your trading style and improve the terms in which you do business. One thing I did was sign up for a third-party verified track record website to help with this self-analyzing. If you’re interested in analyzing your trading results, I suggest doing the same thing so that you can spend more time reviewing your track record and less time accumulating data. If you are studying your habits with enough metacognition to make the necessary adjustments, your future self will thank you.

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