Risk Management

The Hidden Cost of Trading: Commissions, Spreads, and Taxes

Every trade has costs that erode profitability — understanding them prevents under-sizing your edge requirements.

Key rules

1. Commission, spread, swap, and taxes all reduce net profitability
2. Calculate break-even trade frequency against your cost structure
3. High-frequency strategies are most exposed to compounding costs
4. Commissions on small accounts can dominate returns
5. Use limit orders to reduce spread costs where possible

Costs include: commission (fixed per trade or per share), spread (bid-ask cost on every entry and exit), swap/rollover fees for holding leveraged positions overnight, and taxes on gains.

On a strategy targeting 0.5% per trade, round-trip spread costs can represent 40% of gross profit. Factor all costs into your backtest and expectancy calculations.