Commissions and algorithmic trading

Are you interested in doing algorithmic trading?

Do you think that is the best way to avoid having all those “problems” you have now when it comes to finding a winning system?

Before getting into the world of algorithmic trading, I want to tell you one thing.

And I’ll save you read the article until the end. If you want you can read it, but you have to know the following: if you want to make money with algorithmic trading it is through the development of systems that you then sell to others.

What’s the trick?

Well, as practically all systems that are sold in the market: they are not long-term winners.

However, the issue that I am going to discuss has to do with the commissions that occur in this algorithmic trading and that in the end are a matter of crucial importance.

Those who think about doing algorithmic trading rarely think about the commissions and costs they will incur when making this type of trading.

The problem that arises is that the commissions have another concept that is called spread and that is as or more important than the pure commissions charged to us by the broker.

This issue of the spread is crucial because it is not stable, and of course, when we do, for example, backtests, we have the “stability” of it. That is to say, the variable spread does not present us with variations.

Trading costs increase dramatically during certain events

In reality, this is not the case, and depending on the conditions of the moment, starting with a news broadcast, we have quite significant increases in the spread, which produces a massive rise in trading costs.

Well, these trading costs are very important in any trading system, including swing or trading in the medium term.

Now, for day trading or high frequency trading, these costs become a matter of life or death.

Whenever I have tried to trade very often I have encountered this type of problems, to the point that a large part of the failures in my attempts to dominate aggressive day trading have come about.

Algorithmic trading and its effect on day trading

The greatest effect of algorithmic trading, at least from the point of view of retail trading, is the fact that it has dramatically increased the number of people trying to win with short-term trading.

Surely you’ve heard things like that the commissions are not the culprits that you lose and things like that, but nobody tells you about the spread, and that the increases of the same in those specific moments are eating your account in a sibylline way.

You can have a look at the Bitcoin market or cryptocurrencies so that you can see how the spreads themselves give quite brutal jumps, of 500 or 1,000% increase, for a good part of the day.

The issue is that people look more confident to make short-term trading, either with systems bought from others or even developed by themselves, but the reality is that such systems are only going to bring one thing with almost all security: an impressive increase in the number of operations carried out with the commissions that this entails and with the relevant spreads, that nobody measures.

With algorithmic trading we can do 10, 20 or 30 operations a day without dishevelling.

Those 20 operations, for example, will have their commissions to pay, and their associated spread costs, which in many cases are as large or more than the commissions themselves.

In the end, after having made 500 or 1,000 operations you realize that the commissions have eaten your account and that for some reason you have not won as many times as you had planned.

The first point is something that in the background you expected.

The second not so much and you did not finish explaining why. However, it is related to those “spread problems” that include slippage and other foreclosures, such as an operation that is losing due to that increase of the spot spread of 1 pip, when the test you had done told you that it would be Winner

Once you add up dozens of those situations you will find that your great algorithmic day trading system will end up ruining your account.

how do you think the developers of algorithmic systems that sell to the public are making a living?

You really will not believe that they do it from the profits they get with the trading of those systems, right?

I think it’s obvious where they get their profits from.

In the end that is the big problem of algorithmic trading; nothing less than the fact that the number of day traders has increased dramatically or that they “automate” their systems, but in the end what they are automating is a perfect machine to make commissions of all kinds for brokers, which delighted offer all the possibilities so that their traders can put into play those systems so “sophisticated”. Because here comes another interesting topic, which is where people get lost.

Let’s see, the systems are really sophisticated, in the sense that they require impressive programming and invention skills.

There are great ideas and great applicators of those ideas in the computer system. What happens is that this complexity in the development of algorithms cannot make those systems are going to be winners in a market that favours so dramatically brokers and dealers.

In other words, one thing is the “algorithmic traders” of Goldman Sachs, which in reality are not that but “algorithmic dealers” and another thing is the “algorithmic traders” of walking around the house.

The difference is like between night and day.

You and I are among the latter, of course, and let me tell you that algorithmic trading, at least very often, is not the best for us.

Greetings and good trading.