Here’s another thing you need to know: How much commission you pay when you place a trade depends on the number of lots you trade or your position size.
The bigger your position size, the bigger the number of lots you trade, and the higher the commission you pay for that trade.
Now, what determines the number of lots you trade or your position size? It depends on how close your stop-loss is.
If you’ve read my article on position sizing, you’ll remember this formula:
Your stop-loss distance is the only thing you can really control on a trade-by-trade basis.
The smaller your stop-loss distance, the bigger the number of lots you trade, and the more commission you pay.
Examples
Let’s look at how this plays out using a Forex position sizing calculator available online.
In this example, your account size is $5,000 and you are risking 3% per trade. Say, you’re trading EUR/USD and your stop-loss is 8 pips away.
Using the calculator, you know you’ll be trading 1.875 lots. So if you’re paying a commission of $7 per lot per round trip, that’s $7 x 1.875 lots = $13.13 commission.
Now, what if in another trade, your stop-loss is 20 pips away?
Using the calculator, the number of lots you’ll trade is now 0.75. So $7 x 0.75 lots = $5.25 commission.
So you see, the tighter your stop-loss, the higher the commission you pay for a trade.
Should You Always Go for Wide Stop-Losses Then?
Now, you may be thinking, “If that’s the case, I’ll just put a wider stop-loss of 20 to 50 pips! Then I can pay less commission.”
That’s okay if you’re a position or swing trader. You are in the trade for a few days or a few months, so your stop-loss is usually further, like 30, 100 or 200 pips away.
When you’ve got such a wide stop-loss, the number of lots you trade would be less. So you worry less about transaction cost as it takes up a smaller percentage of your profit.
But what if you’re a day trader like me?