- Why do
we need to pay commissions?
- The commission a broker/dealer charges
pays for services that enable him to do the trade. Without getting
into the boring details, a trade goes through execution and then
clearing. The broker/dealer must pay for trade execution and
also pay for trade clearing services. These services might be
subcontracted to other firms such as execution to Townsend Analytics,
LTD (Realtick software) and clearing to Penson Financial Services,
Inc. Some of the large broker/dealers, such as Etrade might have
in-house services, but they must be paid for just the same.
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- Free commissions
- Some firms were offering free commissions,
although I think most have stopped. Giving away commissions goes
against common business sense because a business that gives away
its product will go out of business. So, how does a business
survive if it gives trades away? Logic says that the business
must be getting money from somewhere, but where?
- Enron and others illegal "stuff"
has caused many companies to change their once questionable business
practices. One of these was to make money on the back end of
the trade rather than on the commission. Market makers that had
access to order flow could manipulate orders to make dealer profits.
Direct access trading took away most of the manipulative powers
of the market maker as has stronger regulation.
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- The bottom line is that if you want to trade you must pay commissions.
For the active trader, commissions are a cost of doing business,
but using good business sense, we need to keep our costs to a
minimum. The obvious system is to find a broker/dealer that provides
good service and direct access trades with low prices.
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- Here is a legal way to dramatically reduce commissions, especially
when daytrading. This method works when you are long (own) a
stock and want to short it or if you are short the stock and
want to go long (buy) the stock. Check the following strategy
with your broker/dealer to be sure his system will allow this
type of trading and if it doesn't, change brokers.
- Suppose you bought 200 shares of Intel
and it looks like it has topped out and will be heading down.
Instead of selling 200 shares and then selling short 200 shares,
simply sell short 400 shares. The software should sell the 200
shares in your account and then sell another 200 shares short.
This reduces your commission cost by half! One trade instead
of two. Now suppose you are short the 200 shares and want to
buy 500 shares. Simply buy 700 shares. The first 200 shares bought
will cover your short position and then the next 500 shares bought
will add to your account. The cost is one trade commission instead
of 2. Your commissions have been cut in half! When
selling short, the bid test rule will apply.
-
- Of course, if you have Princeton's TradeTutor you would
already know this as well as how to sell short and tons of other
ways to help make you a cut above the rest.
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- In the last newsletter we were looking for a possible trend reversal
by the indication of a "confirmation of the low" or
a "double bottom". This chart of 7-8-02 shows that
we got neither
 as
the index broke through and kept going until forming a small
retracement.
- The overall down trend and the minor down
trend are still valid. We might get some sideways movement until
congress passes a bill that restores confidence in the investing
public, at which time I think we will see a violent move upward
bigger than the move after the low you can see in the chart of
Sept. 2001. I would be looking for an engulfing pattern to occur
signaling a reversal. The candlesticks indicate what is going
on in our economy. Low confidence in the markets cause people
to stop buying stocks, so we get average candles. When a big
event occurs we get a very long candle in one direction or the
other because lots of people are either buying or selling that
day. If the big event is real then others that don't follow the
market everyday join in moving the index in the same direction.
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- Remember: Don't let the pain of seeing your stock holdings
going down keep you from analyzing the market each day. Locating
reversals can be the most profitable time to trade.
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- There are 2 main reasons why I take the time to publish this newsletter.
The first is to share my knowledge with fellow traders because
I love profitable trading and the second is to introduce people
to Princeton's TradeTutor courses. I put an incredible amount
of time and energy into developing the TradeTutor to educate
traders in our trading room. At less than $1000. it is a bargain
and if you go to Princeton's TradeTutor site you will find a
way to save $100.00. click
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